Wednesday, June 1, 2011

UltraShort China (FXP) - Order Flow, Vol and Fraud

FXP is trading $25.93, up 2.5% with IV30™ up 6.3% as of ~10:40am EST. The Livevol® Pro Summary is included below.


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The investment seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE China 25 Index®.

I wrote about this one for (OptionsProfits), so no specific trade analysis in this blog. But, this is more of a general piece anyway -- examining China and fraud.

The ETF has traded 9,127 contracts in the first hour (ish) on total daily average volume of just 684. All but 94 contracts have been calls yielding a 96.1:1 call:put ratio. The Jul 26 calls have trade over 8,500x. The Livevol® Pro Stats Tab is included below.

China has been on my radar because of the financial fraud worries that are swirling. In another life I was the director of research at Audit Integrity -- a great quant forensic risk and fraud firm. I published some research which illustrates empirically that fraud clusters (and how to price a fraud swap – contact me for details).

In English, frauds beget other frauds. As we have started to uncover fraudulent accounting in China, it’s possible that the frauds (or really, fraud discoveries) will catapult into what we had after the Internet bubble in this country (Enron, WorldCom, HealthSouth, Global Crossing, etc.). If that’s the case, there’s a non-trivial possibility that the Chinese equity markets spasm lower – and by spasm, I mean more than 25% in less than a year.

Let’s look to the Skew Tab for FXP and examine the month-to-month and line-by-line vols.

We can see the front month shows a bend up to the OTM calls. This is actually “normal” skew, as the ETF is a short investment. It’s interesting to note that the Jul calls actually bend back down after the 30 strike. I’m actually not convinced that the order flow today in the July options is substantially purchases, although the elevated vol is confirming evidence of purchases.

Let’s turn to the Charts Tab (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The IV30™ is up today and at least for now is higher than the short-term and long-term historical vols. Having said that, the vol isn’t extraordinarily high or low for this issue.

I’ve included the Options Tab below for completeness.

I’ve highlighted the Jul 26 calls. The existing OI is just 90, so if the trades are one-sided today, those are opening positions. You’ll note that there isn’t a single line with more than 300 OI – so yeah, 8,500 in an hour is sizable for this issue.

This is trade analysis, not a recommendation.

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