(Bloomberg) -- A method to play the trade war shows investors are positioning for a positive outcome to talks between the U.S. and China during a G-20 summit in Japan.
Days before the U.S. and China officials are set to meet in Osaka, bullish bets on the iShares China Large-Cap ETF are going up. The demand for options betting the exchange-traded fund will rise made bullish calls pricier and pushed the cost of protection against a 10% loss in the fund to the lowest level since early December. That was when Donald Trump and Xi Jinping agreed to a temporary truce in the trade spat during a G-20 summit in Buenos Aires.
Hopes are high that this summit too will bring positive news for those waiting for a resolution in trade. If things work out, investors in the $5.5 billion ETF could see it going up again after a violent roller-coaster year-to-date. If things don’t, those invested in the ETF known by its ticker, FXI, could be in for more turbulence ahead.
The fund rose 20% from its low in January through an early April peak over trade-deal optimism, before falling 13% as hopes of a breakthrough waned through most of May. The past 30 days, it’s gained 6.5%. On Monday, 63,000 call options with a July 19 expiration date traded on U.S. exchanges, the most among any contract that changed hands.
The ETF was little changed in New York Monday after gaining 5% last week, the most since November. To Mandy Xu, chief equity derivatives strategist at Credit Suisse, a way to play the potential upside in the fund is to buy a July 19 $44/$46 call spread. An option betting that the Xtrackers Harvest CSI 300 China A-Shares ETF would fall to $26.71 on July 19 could be a way to hedge the position.
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