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How to Play the China 25 Index


Buying options paper can help avoid a mess with China25 Proshares.


Ryan Renicker of Ticonderoga Securities shares this idea on China:

China 25 Index (FXI) has outperformed SPX during the past 10 years. This trend, however, is subject to hiccups. I believe this year is one of those years and should be similar to 2004, with the SPX outperforming FXI. Long SPY/Short FXI trade up about 7% year to date. I see another 15% to 20% upside on this trade for the remainder of this year. Reiterate Long SPY/Short FXI relative value idea.

Say you agree, how's the best way to play this concept?

Well, FXI is often tricky to borrow, but has an evil leveraged -2x ETF friend, UltraShort FTSE/Xinhua China25 Proshares (FXP). But alas, like all other leveraged ETFs, it's a rough hold. FXI is down 10% or so YTD, while FXP is up 10%. Sounds great, except FXP is double negative, so you'd want to see it up 20%. Go back further and you see similar difficulties, like up 30% since the November FXI top, but FXI down 20% since then.

Well, we always have the puts options. FXI 30-day volatility (close to March) is a smidge over 30. That's off lows of near 25, but very much in line with realized volatility that's now in the high 30s on the 10-day. That's the high end of the HV range though, as it troughed at about 15 in early January. Still, I'd rather buy options paper here than sit with the FXP compounding mess.

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