Options for stock investors. A better way to trade.

New Trade Alert December 28th – iShares FXI China ETF

New Trade Alert for (FXI)

Buy iShares China ETF June $30 Call @$5.50 or less

 


Risk Rating: 2.5     (1 = lowest   5 = highest)

Above Break Even Probability: 47%

Max Loss Probability: 15%


 

A stock surge has the S&P up 10% in 2016 as we approach year end.  It can be attributed to a combination of relief rally after the election, return to corporate earnings growth, and the energy stock recovery on $50 Crude Oil all contributed to newfound confidence in corporate America.

 

The best laid plans of mice and men are yet to even be implemented with this SEVEN YEAR rally extending gains in the last month and a half.

 

Patience is at a premium with the easy money already made as reward to risk leverage for bullish buyers has been taken away making it more difficult for traders.

 

Tough trade talk has China stocks in retreat to the lowest levels since July.

 

The iShares China ETF was actually outperforming the S&P for the year in October before the latest U.S. stock buying burst.

 

 

 

The FXI iShares China ETF stands at MINUS 5% in 2016 compared to the surging US stock market.  The larger multiyear FXI range from $30 to $40 has the midpoint resistance at $40,15% above current trade.

 

 

 

A CHINA crisis crush saw a 50% fall in 2015 but that was AFTER a rally to the highest FXI levels since 2008.

 

 

 

Action had remained range bound between $36 and $38 for almost six months targeting $34 on a downside breakdown.  That $34 level has held as a measured move support point to lean on.

 

A recovery rally to the channel top projects a move to $40.

 

This is an opportunity to use the power of options for a capital preserving stock substitution strategy.

 

The June option has almost six months for Bullish development.

 

An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the ETF share cost itself.

 

The Options Way: Unlimited Upside Potential with Limited Risk.

A iShares China ETF long call option can provide the staying power in a potential larger trend extension.  More importantly, the maximum risk is the premium paid.

 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.

There are two rules options traders need to follow to be successful.

Rule One Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.   It is also important to buy options that payoff from only a modest price move.

 

There is no need to ONLY make money on the all but infrequent long shot price explosions.

 

Good Options can profit from just modest directional moves.

Any trade has a fifty/fifty chance of success.  Buying In The Money options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

 

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.

With FXI trading at $34.35, for example, an In The Money $30 strike option currently has $4.35 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop.  Time is an investor’s greatest asset when you have completely limited the exposure risks.

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

Trade Setup: I recommend the FXI June $30 Call at $5.50 or less.

 

 

A close in the FXI ETF below $32 on a weekly basis would trigger an exit. Notice the $32 strike has the right to be long from a discounted level that marked the June low.

 

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

 

The option also behaves much like the underlying stock with a much less money tied up in the investment.   The Delta of this $30 strike is 80%.

 

The June option has nearly six months of time for bullish development.

The maximum loss is limited to the $550 or less paid per option contract with an exit stop loss at half the option premium to reduce dollar exposure. The upside, on the other hand, is unlimited.

 

The FXI option trade break even is $35.50 at expiration ($30 strike plus $5.50 or less option premium). That is about a dollar above the current ETF price.

 

A push above $38 channel top resistance targets $40 which would put the option value at $10.00 to nearly double the original investment.

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