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How to Profit on China Even If the Experts Are Wrong

By Jeff Clark
Thursday, February 4, 2010

The experts can't seem to agree on China.
 
China bulls, like famed investor Jim Rogers, argue the country's stunning growth will continue for decades and investors will make truckloads of money. Meanwhile, the experts who are bearish on China, like short-selling guru Jim Chanos, believe China's debt bubble is "Dubai times 1000" – the bursting of which will cause massive losses.
 
Personally, I agree with Chanos. But that may just be my own bearish bias shining through.
 
It doesn't matter, though. Whether I'm wrong or right, I have a simple trading strategy for China that makes money either way. For example, I was wrong when I turned bearish on the Chinese stock market last September. The Shanghai stock exchange bolted 300 points, or nearly 10%, higher shortly afterward. But the short China trade I recommended to my Advanced Income subscribers still made 61% in just three months.
 
On the other hand, I was right when I reiterated my bearish stance last month. This time, subscribers made 47% in only three weeks.
 
Here's how it works...
 
The ProShares UltraShort China ETF (FXP) is an exchange-traded fund designed to return 200% of the inverse daily change in a basket of Chinese stocks. So if Chinese stocks fall 10%, then FXP rallies 20%. If China runs 10% higher, FXP drops 20%.
 
As a China bear, I'm interested in owning FXP. But I don't want to own the stock itself. And I don't want to buy risky call options – because I'll lose money if FXP falls. Selling uncovered puts on FXP shares, however, puts cash in my hand immediately, allows me to profit if FXP moves higher, and pays me enough to absorb the risk if the stock moves against me.
 
For example, the trade I recommended to subscribers back in September was to sell the FXP December 9 puts for $1.35. FXP was trading near $9 per share at the time, and this trade obligated subscribers to buy the stock for $9 if it closed below that level on option-expiration day in December. In return for the obligation, subscribers received $1.35 per share, or $135 per option contract, immediately.
 
This cash went right into their pockets and created a terrific source of current income. Plus, it provided a hedge against a downside move in FXP. As long as the stock stayed above $7.65 ($9 obligation to buy FXP minus the $1.35 received from selling the put) the trade was profitable.
 
FXP was trading at $8.75 by the time the option was set to expire in December. Subscribers bought the put back for $0.25 and recorded a $1.10 per share ($110 per option contract) profit on the trade. That's a 61% gain on the margin required for the position.
 
In other words, FXP actually fell in value, but because of the cash subscribers received for selling the put option, they still made money on the trade.
 
We had a similar trade set up in January. This time, however, FXP moved higher and we were able to close the trade out in just three weeks.
 
Indeed, this simple strategy generates current income and high rates of return while taking on far less risk than buying FXP shares themselves.
 
The trick is to know when it's the best time to sell the uncovered puts. But that information is reserved for Advanced Income subscribers.
 
I will tell you this, however... Another put-selling opportunity is beginning to take shape and is probably no more than a week or two away. If you'd like to know more about this exciting, low-risk strategy to profit off China, then click here.
 
Best regards and good trading,
 
Jeff Clark




In The Daily Crux
Market Notes
Mega fast food company McDonald's surges 5% in two weeks... hits a new high.
 
Biotech fund XBI breaks out to new high... up 7% in a month.
 
Copper slide continues... down 8% in the last week.
 
Earnings today... CIGNA, Kellogg, MasterCard, Moody's, Northrop Grumman, Reynolds American.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%