Market News

December 30, 2016  Fri 8:22 AM CT

Investors are positioning for a potential drop in the Chinese stock market as concerns over a trade war escalate.

The iShares FTSE/Xinhua China 25 Index Fund saw heavy put buying yesterday amid rising tensions over last week's appointment of hard-liner Peter Navarro to head the new White House National Trade Council under the Trump administration. The move drew strong criticism from Beijing-sponsored media outlets, the latest response from the Chinese government to the president-elect's stance on U.S.-Sino trade issues.

Our monitoring systems detected the purchase of 16,590 January 2018 24 puts in FXI for $0.75 and $0.80 yesterday. These are clearly new positions, as open interest in the strike was a mere 12 contracts before the trades occurred.

Long puts lock in the price where a stock can be sold, so they make money if shares decline. Investors use them to hedge long positions or to speculate on a drop. (See our Education section)

FXI, which tracks large-cap Chinese equities, rose 1.31 percent to $34.81 yesterday but is down 10 percent in the last three months. Overall option volume in the fund was about average yesterday, but puts outnumbered calls by a bearish 3-to-1 ratio.

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