No Santa Claus Rally Seen for iShares China Large-Cap ETF (FXI)

A sell-off in China has traders betting on a steeper swoon for FXI

by Andrea Kramer

Published on Nov 27, 2015 at 10:44 AM
Updated on Nov 27, 2015 at 10:53 AM

The shares of iShares China Large-Cap ETF (FXI) are down 2.9% at $36.85, after Chinese stocks were sent reeling amid a broad investigation into potential trading rule infractions. What's more, option traders aren't gambling on a Santa Claus rally for the exchange-traded fund (ETF), with short-term puts gaining traction today.

FXI has seen roughly 26,000 puts change hands -- more than 10 times the number of calls exchanged. Of the 10 most active strikes, nine are puts, with just one expiring in 2016. Aside from a spread in the weekly 12/11 series, garnering attention is the 12/31 34.50-strike put, where more than 2,200 contracts have traded. 

It seems a healthy portion of the puts were bought to open at a volume-weighted average price (VWAP) of $0.48. By buying the puts, the traders expect FXI to breach $34.02 (strike minus VWAP) by the close on Thursday, Dec. 31, when the weekly contracts expire. Delta on the put has moved to negative 0.23 from negative 0.15 on Wednesday, reflecting the growing odds of an in-the-money finish at expiration.

Put buying is nothing new for FXI, though. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF sports a 10-day put/call volume ratio of 1.77. This ratio stands higher than three-fourths of all readings from the past year, pointing to a healthier-than-usual appetite for bearish bets over bullish of late.

What's more, FXI's near-term options are attractively priced, historically speaking. The ETF's Schaeffer's Volatility Index (SVI) of 22% sits higher than just 11% of all other readings from the past 12 months. That could be because FXI's 30-day historical volatility sits at 16.2% -- above only 1% of the past year's worth of readings.

On the charts, iShares China Large-Cap ETF (FXI) has struggled in the second half of 2015, hitting an annual low of $32.80 during the August swoon. Since then, the ETF has attempted a modest rebound, but has run into a wall in the form of its 10- and 20-week moving averages. 

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