FTSE Xinhua China Index Fund (FXI) is an exchange-traded fund that holds holds 25 H and Red Chip stocks. Red chip shares are Hong Kong incorporated companies while H shares are companies incorporated in the Peoples Republic of China (Link to fund information.) One options strategist appears to like the idea. In morning trading Thursday, 20,000 July 38 calls traded for $1.29. These calls were sold against a position in FXI shares, as part of a covered call or buy-write strategy.

In most “buy-writes”, the strategist is selling 1 call for every 100 shares and has a moderately bullish view on the stock or exchange-traded fund. In this example, calls were sold for $1.29 against shares for $37.25. Since the multiplier of an options contract is 100, the sale of the calls reduces the cost of owning FXI to $35.96 per share (excluding commissions). $35.96 is now the downside breakeven through the July expiration and if the ETF falls below that level, the covered call will show a loss. On the other hand, if FXI moves higher, the trade becomes profitable. The maximum profit happens if the exchange traded fund closes at $38 or higher at July expiration (29 days). At that point, the shares will be “called away” for $38 and a 5.7 percent profit. If it fails to reach that level, the strategist can close the position or sell calls in a later expiration month, like August.

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