5 ETFs to Play Google vs. China

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 |  Includes: BIDU, EWH, FDN, FXI, GOOG, SPY, XLK, YINN
by: Andrew Hart

In recent weeks the Google (NASDAQ:GOOG)—China relationship has taken a decisive turn for the worst. Almost from the inception of Google China in 2005 the company faced criticism for cooperating with Chinese government officals’ request to censor search results; now in 2010 Google has accused the Chinese government of hacking its servers.

I took advantage of Google’s own "Search Suggestion" feature to summarize the good, the bad, and the ugly of recent events (pictured below, click to enlarge).

Google China Suggestion Hackers Censorship Revenue
The raised tensions have led to fierce words from both sides. A recent China Daily article suggests Google action has started a Cyberwar. This is likely spin, however, and there are implications (and opportunities) from the fallout that traders should focus on. Let’s take a look at the 5 ETFs (and 2 Stocks) that are primed for big moves.
5 ETFs to Trade
The best way to gain direct exposure and trade the news is directly from Google’s stock or the benchmark China ETF, XINHUA China 25 (NYSEARCA:FXI). There are limitations for many traders when it comes to the $550 price tag for a share of Google, so let’s explain the alternatives. I prefer a few ETFs that are sure to move on these events.
Here’s a list of Exchange Traded Funds that are likely to see big moves:
Don’t Expect a Fast Resolution
You may ask yourself why now is a good time to enter into these trades and, more importantly, which side to trade, bull or bear? Rest assured, these issues won’t dissipate overnight. In fact, it’s been rocky for five years, and Google’s decision to "leave" China raised the stakes. To grasp the roots of recent events, here’s a quick timeline:
Timeline:
July 2005: Google China Launches
January 2006: Google complies with Chinese Censorship
January 2007: Google Admits problems
March 2009: YouTube Blocked in China
September 2009: Shake up in China: CEO Steps down amid expected pressure from Gov’t
January 2010: Google threatens to leave China (Google’s Official Blog)
January 12: Google Reports digital thieves stole code etc.
March 2010: Google Leaves China
Three Charts and a Trade Idea
Here’s a quick look at how China and Google have performed over different time periods. Since the inception of Google China (2005) both have outperformed the SPDRs S&P500 (NYSEARCA:SPY) significantly, but FXI edged out a 115% gain versus GOOG’s 83%.
Conversely, looking at the percent change chart for 2010, the S&P500 has outperformed both Google and FXI. In both scenarios Google has failed to be the top performer. Pressure on Google could be more bearish than bullish in investors’ eyes…no matter how patriotic it seems.
Since trading news is generally unpredictable it may be prudent to focus on increased volatility, not so much the direction. Options traders can look at buying a strangle on April contracts in GOOG. As it stands now, the implied volatility is 66% higher than historical and rising. This is happening for two reasons: uncertainty of GOOG v. CHINA impact/outcome and because Google reports earnings on April Expiration. From a conservative standpoint, I would look at buying April 560 Calls and April 530 Puts effectively banking on a move outside of that range on April expiration. The downside here is mainly cost, so traders can also look at applying this method to ETFs like XLK or FDN.
What are your thoughts on these events and how do you plan on capitalizing on the increased volatility? There are an infinite number of ways for options traders to structure trades, but are you bullish or bearish on FXI and GOOG?
Disclosure: None