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Options Jive

Monday – Friday | 8:40 – 9:00a CT

The Chinese ETF

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment examines FXI, the Chinese stock market ETF, how its options have traded and how often it stayed within 1 and 2 standard deviation moves as indicated by its options. This timely segment should increase your knowledge and help your trading decision making process.

Markets worldwide have seen some extreme moves lately and the most extreme have been in the Chinese markets. The China large-cap ETF, FXI, has declined by more than 20% in the past two months. Implied volatility is currently 42% with IVR at 58%.

Earlier in 2015 there were some huge moves up. Since the high on April 27th, and especially since a reaction high on May 26th, there have been many sharp down moves. This has made for a difficult environment in which to sell premium. First those short calls consistently were tested and then those short puts have felt the pain.

A table was displayed of short one standard deviation Strangles in SPY (for comparison purposes) and FXI sold on the first trading day of each month in 2015. We chose the expiration closest to 45 days to expiration (DTE). The table showed the average credit, winners and PL for Strangles managed at 50% of max profit and held to expiration for both the FXI and SPY. Premium sellers following this strategy made money in the SPY and lost in the FXI. The contrast was clear.

We examined historical moves as they relate to expected moves in FXI. Traders can calculate the expected move by using VXFXI, the listed implied volatility index for FXI and the formula provided here and previously on tastytrade.. We then did the same in the SPY using the VIX. Expected moves are calculated every day for a 30 day rolling window.

A second table was displayed that calculated the daily expected moves compared to the actual moves in the FXI and SPY from March 2011 to present. The table showed the expected occurrences inside the calculated 1 & 2 standard deviation range and the actual occurrences inside a 1 & 2 standard deviation range. A third table displayed the same type of data but just for 2015. The difference was clear.

Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the takeaways and for a better understanding of FXI, the Chinese stock market ETF and what premium sellers need to know about it as regards to their trading.

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