(Bloomberg) -- Traders snapped up bullish option bets Friday on exchange-traded funds linked to Chinese stock indexes after US President-elect Donald Trump and Chinese President Xi Jinping discussed trade and other topics.
Call options were bought in iShares China Large-Cap ETF (ticker FXI) allowing the holders to purchase some 4 million shares by the end of next week at levels from $31-$32, with additional buying for February expiration, according to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. Similar calls were in demand for other China-linked funds, including KraneShares CSI China Internet ETF (ticker KWEB).
The underlying ETFs surged Friday on optimism that the conversation between the two leaders may portend smoother trade relations. The incoming Trump administration has signaled a willingness to boost tariffs on Chinese imports, which has added to pressure on the country’s shares already hit with weakness in the real estate sector. FXI rose as much as 2.9%, while KWEB climbed as much as 4.4%, both notching the biggest gains in more than a month.
The purchase of call options boosted one-month implied volatility on FXI to the highest since mid-December, and widened the premium of calls over puts, known as the skew. The latest activity adds to purchases seen earlier in the week.
Waves of buying and then selling on failed rallies is a pattern seen over the past few months. In late September, purchases ramped up around a meeting of top Chinese financial regulators. After the stimulus package that emerged from their meeting failed to sustain a stock rally, bullish bets faded.
More recently, in early December a trader amassed large volumes of calls on thinly traded leveraged ETFs tied to benchmark indexes, only to close those out at a loss of some $100 million a week ago as the underlying assets tumbled.
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