FXI Analysis

The iShares China Large-cap Exchange-Traded Fund (FXI), which tracks the FTSE China 50 Index, fell below its 20-day price channel on Friday. The fund has low historical odds of producing a successful bear signal, making it a candidate for a direction-neutral trade.

The index tracks the 50 most liquid Chinese stocks trading on the Hong Kong Stock Exchange. The three top holdings as a percentage of net assets are Tercent Holdings Ltd., China Mobile Ltd. and China Construction Bank.

I shall use the JUN1 Weeklys series of options, which trades for the last time four days hence, on June 5.

[FTSE China 50 Index information from the FTSE Group (pdf)]

FXI

Ranges

FXI has completed four bear signals in the past year, for a 25% success rate. The one winner yielded 1.5% over 39 days. The three unsuccessful signals lost 4.1% over 13 days, on average.

Click on chart to enlarge.

FXI at 11:15 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 30.5%, which is 2.1 times the VIX, a measure of volatility of the S&P 500 index. FXI’s volatility stands in the 32nd percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	50.31	51.87	52.08
Lower	47.21	45.65	48.71
Gain/loss	3.2%	6.4%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

FXI has been roaming sideways since late April in a pattern that can be seen as a descending triangle, (in blue on the chart), a bearish pattern. That means I need a profit range that covers close to the chart-range high, $52.08 down to the support level, $48.71.

Iron condor short the $52 calls and long the $53 calls,
short the $48.50 puts and long the $47.50 puts
sold for a credit and expiring June 6
Probability of expiring out-of-the-money

JUN1	Strike	OTM
Upper	52	90.3%
Lower	48.50	64.2%

The risk/reward ratio stands at 2.7:1.

Decision for My Account

This chart is unusual in that it imposes well-defined requirements on the trade structure. The potential trade described above meets those requirements. The resulting risk/reward ratio is 2.7:1. For an iron condor, I don't like to go above 2:1. Therefore, I'm declining to take this trade.

-- Tim Bovee, Portland, Oregon, June 1, 2015

References

My volatility trading rules can be read here.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.