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FXP: I Don't Like This for a Trade

ProShares UltraSh FTSE/Xinhua China 25 (FXP) is trading $25.93, up 2.5% with IV30¿ up 6.3% as of ~10:40 a.m. EDT. The Livevol® Pro Summary is included below.

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 noticed this ETF today because of the volatility jump and the order flow in the July calls. 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 July 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 -- what I believe to be the foremost expert in company specific forensic fraud and fraud measures. 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.

Back to today's trade analysis...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 July 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. They actually look, at least in part, to be sales.

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).
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