Options for stock investors. A better way to trade.

New Trade Alert December 29th – FXI China iShares ETF

CHINA BASH BASE

 

New Trade Alert for (FXI)

iShares China Exchange Traded Fund

Buy May $32.50 Call @$4.75 or less

 


Risk Rating: 3     (1 = lowest   5 = highest)

Above Break Even Probability: 45%

Max Loss Probability: 23%


 

The irrational rally in China stocks saw an amazing jump until mid 2015.  The late buyers lost sight of that fact that a straight up market ALWAYS has to correct…eventually… 

The FXI  iShares China ETF had rallied from $32 in March 2014 to $52 in April 2015.  A full price retracement has brought the high flyer back to the base.  The $42 midpoint of the range is the next upside target.

The psychology, sentiment and selloff all have participants extremely negative on China.  A one sided oversold market is ripe for a bullish bounce.  The risk reward favors buyers leaning on the resent $34 FXI support lows.

 

Only close below the $33.00 recent low on the weekly basis would negate this bullish buying premise.

The Options Way: Unlimited Upside Potential with Limited Risk.

An FXI 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 and strikes.  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.  Just 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 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 large price explosion.

Any trade has a fifty/fifty chance of success. 

Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

Buying better options is 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 $36.00, for example, an In The Money $32.50 strike option currently has $3.50 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.  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 May $32.50 Call at $4.75 or less. A close below $33 on a weekly basis or the loss of half of the option premium would trigger an exit.

 
This option strike gives you the right to buy the shares at $32.50 per share, below the annual lows, with absolutely limited risk.  The 52 week low is $32.80 therefore this option can let you buy in at a major discount. 

   

The May option has nearly five months for BULLISH development.   A 75 Delta on this strike means the option will behave much like the stock.
 
The maximum loss is limited to the $475 or less paid per option contract. A stop loss at half of the premium paid puts the exposure at $225.  The upside, on the other hand, is unlimited.

 

The FXI option trade break-even is $37.25 at expiration ($32.50 strike plus $4.75 or less option premium). That is just 1.25 above the current China Large Cap ETF price.

A halfway recovery of this current China drop targets $42.  At that level the option investment would gain 100% to $9.50. 

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