It was a terrible day for Chinese stocks on Monday due to concerns over the potential negative economic impact of the Wuhan coronavirus. The iShares FTSE/Xinhua China 25 Index (NYSE: FXI) dropped 4.2% and had the attention of at least one large option trader.
On Monday, Benzinga Pro subscribers received two option alerts related to unusually large trades of FXI ETF options.
- One trader sold 1,289 FXI ETF call options with a $43 strike price expiring on March 20 near the bid price at 49.1 cents. The trade represented a bearish bet worth $63,289.
- Another trader bought 785 FXI ETF call options with a $44 strike price expiring on March 20 near the ask price at 32.1 cents. The trade represented a $41,376 bullish bet.
Why It's Important
Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.
Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.
Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest size of the two FXI ETF trades by institutional standards, they are unlikely to be hedges.
More China Volatility Ahead?
The Wuhan coronavirus spooked the markets again due to new reports that the disease could be more contagious than initially expected.
This is not the first time a Chinese coronavirus scare has rattled the markets. The Wuhan virus is very similar to the coronavirus that caused the 2002 and 2003 outbreak of SARS in China. Bank of America analyst Shaun Kelley compared Wuhan to SARS.
“What is known about the disease, its curability and how it spreads is still limited but as we learn more, the virus appears to be more difficult to combat than expected, esp. as it may be contagious during its incubation period (unlike SARS),” Kelley wrote in a note.
Chart courtesy of Trading View.
During the peak of the SARS scare from December 2002 to April 2003, the S&P 500 dropped 8.3% and stocks related to discretionary spending and emerging markets (particularly China) underperformed.
The silver lining is that over the next six months after the scare, the S&P 500 more than made up for its losses, gaining 18.6%.
The general consensus among market experts is that the Wuhan sell-off will eventually be a buying opportunity, but timing the dip may be difficult. The good news for long-term investors is that the mortality rate of the Wuhan virus is under 3% up to this point compared to a more than 9% mortality rate for SARS.
Do you agree or disagree with these predictions? Email firstname.lastname@example.org with your thoughts.