China Breakout Imminent (FXI)

We get questions now and again regarding the basics of options trading, but we generally don’t answer them. Not because we’re snobs or in any other way bovine – just that we don’t have the time or space for such matters. The market overall and the weekly trade itself occupy too much of our effort.

Truth is, we’d love to delve into it and be the teachers we genuinely love to be, but a thousand word limit has a way of cutting a great swath of fat from the carcass – whether we like it or not.

That said, we are going to pause a moment to introduce an idea or two here – and we hope to do more if and when time permits in the months ahead – even though our intermediate and expert readership might consider it a tad dull. From them, we beg indulgence and promise to keep it brief.
hitme

Let’s start with just a word on option prices.

The price quoted for an option is the cost of an option on a single share of the stock in question. So when you see us referring to ABC company’s option price as $1.35, it means the price of the option for one ABC share is $1.35.

As most of you know, however, we don’t buy shares one at a time, but in board lots of 100, for the most part.

So it is, too, with options.

So when you buy ABC’s option for $1.35 you’ll see your account debited $135 when the trade goes through – the quoted price of the option multiplied by 100.

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Now that that’s clear, you’ll notice, too, that many of our trades involve a hedge – the purchase and sale of options on the same or different stocks, depending upon what our expectations are for the stock and the trade’s time horizon.

For example, you might see that we buy ABC’s March 100 CALL for $1.35 and sell the company’s nearer-term January 100 CALL for $0.95. Our total debit for the trade would be $0.40 and is premised on ABC rising toward 100, but not arriving there before our earlier CALL expires in January.

And what’s with the $0.40? A measly forty bucks? Who needs it?

 

You should know, too, that when we recommend a trade with a debit of $0.40, we don’t necessarily mean that is all you should or are able to invest. For surely, even with the best results, $40 invested might get you back $100 or $120 at the end of the day, and that’s not going to put peanut butter in the kids’ lunches forever.

Rather, we offer the bare bones, skeletal aspect of the trade and leave it to you to decide how much meat to lay on. For those who have a portfolio of $40,000 or $50,000, we might expect ten pairs opened on the above trade – a $400 investment, and in line with the one to two percent commitment that we generally recommend on the trades we make.

(We’ll always indicate otherwise if a trade is considered a core holding and is worthy of a greater commitment, or the opposite: a speculative play that’s worthy of less.)

Those with larger portfolios will commit greater sums, of course, and might opt to devote 50 pairs to the trade, for a total cost of $2,000 – appropriate for a portfolio in the range of $175,000 to $225,000.

And so on and so forth.

We’ll leave it there for now, but stay do tuned for another Normandy Educational Moment in the weeks ahead.

kickya

For many, it’s hard to get excited about stocks at this time of year. Most folks want to get away and leave the hubbub and the news and the rat-race that envelop us the rest of the year.

But we’re a little different.

When it comes stocks, we’re rather excitable. And that’s why we look overseas this week at a country that has little involvement with western holidays and traditions at yuletide, preferring to race after ever the filthy lucre all year round.

That country is China, and it may be the only wallop-sized market whose volumes and truck are as vibrant this week as they are the annum.

And look what’s going on there –

fxi1229

Essentially, what we see is a market that’s headed toward a multi-year breakout.

After unwinding higher for the first time in almost four-years (red circle), the iShares China Large-Cap ETF’s (NYSE:FXI) moving averages now point to a stock that’s gathering itself for a push on the venerable $42.50 resistance line (in blue). That’s a level that hasn’t been surpassed since FXI trundled beneath it in late summer of 2011.

History in the Making

 

Now, however, the cards are stacked differently. We see a clear ascending triangle pattern (in green), a technical formation that calls for a strong burst northward once the overhead cap-line at $42.50 is breached.

And with both RSI and MACD now cooperating (in black), we could see that breakout any day.

So much for the daily. Have a look now at the weekly chart for the FXI.

fxi12292

Note here especially the short term weekly MA which just now pierced above the rest of the stock’s weekly MA’s (in blue), beginning the process of what we believe will be a grand weekly unwinding of the stock’s moving averages.

The extended resistance line (in black) is also more evident on the weekly chart, revealing the inevitability of FXI’s forthcoming breakout.

And with it, the very high probability of profits from today’s trade.

The wager that emerges from the above two charts is very similar to that which we initiated only three weeks ago in Chinese Market Riddle – Solved!, where we sold PUTs on FXI for a handsome $380 premium.

Today, we sell more.

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Wall Street Elite recommends you sell ten (10) FXI February 37 PUTs for $0.30 each, for a total credit of $300.

 

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Wall Street Elite recommends you sell ten (10) FXI February 37 PUTs for $0.30 each, for a total credit of $300.

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With kind regards, and best wishes for a safe and Happy New Year,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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