As we drift into the latter part of calendar year 2015, there can be absolutely no doubt that the China story has been one of the most prominent themes this year in terms of investment-related news.
After surging through the first quarter of 2015, Chinese equity markets peaked near the end of May and then embarked on a precipitous, extended sell-off.
Having spent a considerable amount of time in Shenzhen and greater China the last several years, I often thought that the stock market there seemed relatively undervalued as compared to the level of economic activity one saw on the ground. So it wasn't shocking to me that equity markets there lifted off in 2014 and surged further in 2015.
What certainly was shocking was the breadth and speed of the rally with virtually every stock in China seemingly along for the ride.
A recent episode of Options Jive takes a closer look at the rally and sell off in China through the lens of a Chinese ETF known by its symbol FXI.
On the show, hosts Tom Sosnoff and Tony Battista provide some insights into the China ETF and analyze how recent volatility in Chinese equities has affected derivatives trading in that security.
Tom and Tony point out early in the show that the FXI had dropped about 20% for the year at the time the episode aired, with implied volatility of 42% and an IVR of 58%. Those numbers of course suggest that FXI might be a good candidate for a short premium trade.
However, Tom and Tony take a deeper dive in the FXI pool by examining how the ETF has acted in recent months and how that volatility has affected derivatives trading in the name.
As one can see below, compared to the SPY, the FXI hasn't been a reliable trade for selling premium so far in 2015.
In China, red is a lucky number, which means up is red and green is down on trading software - the exact reverse from systems in the West.
Regardless of color, short premium trades in FXI have been challenging this year.
But what's more interesting is to look at not only 2015, but to add context through additional data.
As Tom and Tony highlight on Options Jive, a significant proportion of the outsize moves in FXI have been concentrated in 2015 as compared to the set of years immediately prior.
While this might be expected with such a large selloff in Chinese equities, it also may suggest that the time might soon be nigh for a trade opportunity to materialize in Chinese-related premium.
As the graphic below illustrates, 62% of the 2 standard deviation moves that occurred in the data set are found in 2015 - no doubt a significant finding:
As the market marches through the latter part of 2015, it will be interesting to follow how Chinese equities react after such a large, across-the-board selloff.
We urge you to take a closer look at this highly relevant episode of Options Jive when your schedule allows as it may give you some new ideas on where to add edge in your options portfolio.
As always, we thank you for reading and greatly appreciate any feedback!