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November 6, 2012  Tue 12:21 PM CT

FXI: SEE CHART GET CHAIN FIND STRATEGIES
Bulls are storming the China shop, based on option action in a major fund tracking the country's market.

Our Heat Seeker tracking program detected the purchase of 13,250 December 38 calls in the iShares FTSE China Index for $1.02. A block of 19,875 December 36.50 puts was sold at the same time for $0.68. The trade netted out to breakeven cost and is highly bullish on the instrument.

The trader will profit from the long calls if FXI rallies above $38 and lose money on the short puts below $36.50, so the position is very similar to owning the fund. The main difference is that it cost much less to open and will expire worthless if the shares remain between $36.50 and $38 through expiration. (See our Education section)

FXI is trading at $37.88 this afternoon, up 0.24 percent on the day and 7 percent in the last month. That gain comes at the same time that the S&P 500 fell 2 percent, marking one of the rare times in recent years that Chinese equities have outperformed the United States.

After a long period of slowing imposed by the country's central bank, economic data is starting to suggest a return to growth. The ruling Communist party is also in the midst of picking a new leader, which could make some investors expect better numbers once the political uncertainty is removed.
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Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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