This morning the major data point released was jobless claims, which came in at 388K versus 365K consensus and 339K last week. US stock futures have since sold off, erasing modest overnight gains. Though this report is a disappointing 39K increase over last week, it is important to remember that last week’s number was unusually good and could have been the result of incomplete data from a state.

Five days ago the iShares FTSE China 25 ETF, FXI, gapped up over two percent through its 200-day moving average and has rallied ever since. Yesterday we noticed unusual options activity in the ETF. With the underlying at 37.23, one trader sold 20,000 Jan. 34/38 strangles and bought 30,000 Jan. 25 puts, for a net credit of $3.63 million. The core of this position is the 34/38 short strangle, which is a spread that benefits when implied volatility declines and the underlying market moves sideways. However, short strangles have unlimited risk, so this trader hedged themselves by buying deep out of the money puts to limit risk on the downside in the event of a black swan event. This spread will be profitable if FXI is between 32.18 and 39.82 at Jan. expiration in 92 days. These breakeven points are close to the ETF’s 52-week high and low, which could act as support and resistance and help to keep FXI in its range.

Because this spread is unhedged on the upside and could produce potentially unlimited losses should FXI rally hard into expiration, I will be on the sidelines for this one. At better trade in mp opinion would be to turn this into an iron condor by buying calls at a higher strike than was sold. This will reduce potential absolute returns but also reduce margin and therefore can actually increase return on investment.