Option Traders Just Made a Big Bearish Bet on Chinese Stocks

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  • As stocks struggled to end the week in the green, it is leading investors to try to figure out where the market will be at the end of the year. As investors are looking around, trades are being made based on these expectations. For the Chinese equity markets some answers are coming in based on Friday’s option activity. The iShares China Large-Cap ETF (NYSEARCA: FXI) saw a surge in put option activity that is anticipating FXI will test its March low by the beginning of 2021.

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  • China, the world’s second-largest economy, posted a 3.2% Q2 GDP after experiencing its first negative GDP quarter since 1992. The low growth numbers and the negative quarter in Q1 are sparking some concern of a potential correction like 2015. That year, the ETF dropped from a high hear $52.50 to around $30 in a seven-month period.

    On Friday, the option volume was over 50% higher than average with the increased activity coming on the put side with volume nearly twice the average. The put volume finished over 3.5 times the call volume with nearly 50% of the put activity occurring between the market.

    Action to Take: Nearly 30% of the volume occurred in one trade on the 19 FEB 21 $34 put option. Over 26,000 contracts filled in one print at $0.62. The put options appeared to have been purchased and reflects a significant amount of bearish movement in the coming months. The strike price is indicating an expected retest of the 2015 low.

    Option traders may want to consider buying the 19 FEB 21 38/35 long put vertical for around $0.55 or less.

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