Chinese Call Options are Doing Nicely

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Includes: FXI, PGJ
by: Larry MacDonald

The call options on the Chinese exchange traded funds (ETFs), bought two days ago on the dip (see May 30 post), are moving up nicely as Chinese stocks rebound.

The July 108s on the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) are now up over 50% and the July 22s on the PowerShares Golden Dragon Halter USX China (NASDAQ:PGJ) are up over 25%.

It’s interesting to see the difference in gains between the call options on the two ETFs. The FXI tracks Hong-Kong listed stocks with Chinese exposure and the PGK tracks Chinese stocks listed on the U.S. ADR exchange. My guess is that the latter has a higher proportion of large-cap stocks (which have been experiencing a slower rate of increase during the mania than small caps).

Perhaps that’s why the call options on the FXI are more "expensive" – there is a premium for a higher concentration in faster rising small caps (or at least thre is a higher correlation to the soaring Shanghai Index that foreigners can’t buy because of capital controls). The FXI July 108s were purchased at $5.90, when the FXI was at 109.0 (which required a 4.5% rise in the FXI to break even); the PGJ July 22s were purchased at $1.65 when the index was at 22.75 (which required a lesser increase in its index, 3.9%, to break even).

Some people like to buy the “cheaper” options (e.g. see May 26 post of RetireRichBlog.com). But it would appear one also needs to consider differences in volatilities to tell if one is actually a better value than the other.

PGJ FXI 1-yr. chart:

PGJ FXI Investment

Related Articles: Buy-On-The-Dip Opportunity in China ETFs; Anatomy of a Chinese Bubble: A Checklist For Spotting Bubble Tops; China ETF Safety Net: Protect Against Downside Risk; Short Sellers: Maybe Wait With Chinese ETFs

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