iShares FTSE/Xinhua China 25 Index (FXI)

iShares FTSE/Xinhua China 25 Index (FXI) – Chinese shares are up by about 1.5% to $26.85 today amid news that the Chinese government’s $585 billion stimulus package aimed at machinery, construction, and infrastructure appears to be working. Some traders appear to be less confident on the sustainability of Chinese growth prospects in the short-term, as evidenced by 2,000 puts purchased at the March 23 strike price for 74 cents each. These out-of-the-money puts require shares to drop by at least 18% to a breakeven of $22.26 in order to reap profits by expiration. Most notable, however, was one far-term bullish trader who sold 2,000 puts for a premium of 7.00 at the January 25 strike price set to expire in 2011. With time on his side and the apparent initial success of the Chinese stimulus package in his back pocket, this investor is optimistic that shares will remain above $25 in two years. By pocketing the premium today, this trader is accepting the risk of having the shares put to him at the 25 strike price. The effective purchase price is then reduced to $18 thanks to his standing ready to take delivery, for which he reaps a 7.0 premium today.