Trading the Renminbi
There has been much talk recently about China revaluing its currency — lots of different talk. Many market observers believe that the Chinese government will appreciate its currency by roughly 5 to 10 percent in order to curb inflation, cheapen imports like copper, and slow other capital inflows. Some see this revaluation happening as early as April or May, after the Party Congress meeting and during iron/copper contract renegotiation; others don’t see it happening until next year. Still others say that the hype is overblown and that China won’t even revalue its currency.
All this hype, though, means that there is a trade to be had. I’d like to highlight some option ideas available directly to the retail investor involving the exchange-traded fund CYB, which through currency swap agreements tracks the value of the RMB.
Trade 1: Sell $25 put for any date
This trade works regardless of whether or not you believe China will appreciate its currency. As the financial crisis has subsided, CYB has traded in a tight range, $25.60 to $25.20, and it is highly unlikely that CYB will fall below $25. In its short trading history, CYB has only fallen below that level 3 times, which were during the heart of the financial crisis. Barring any unforeseen worldwide financial meltdowns, it is safe to assume that CYB will not pierce the $25 mark as it is highly unlikely that China will devalue its currency. Also, because China keeps it currency pegged, the absence of action by China on its currency will keep CYB’s value constant.
Even if there is a financial meltdown and CYB drops substantially below its NAV, the loss is minimal. Assuming that you sold a July 25 put and received .25 per share (bid ask midpoint at time of writing) and that CYB reached its 52 week low, $24.57, you would only lose $.18 (in addition to the lost premium) per share if your put was called and you immediately sold your shares back on the market.
Trade 2: Buy July $21 Call
While it may seem awkward to buy such a deep in the money call, this is the most effective way to gain leverage from options while paying a minimal premium. If China revalues its currency during the April-May window, you stand to gain a good return on your investment. If China does not revalue its currency the contract still has strong intrinsic value. Assuming that you buy the contract at $4.25 per share (bid ask midpoint at time of writing), you stand to lose very little because CYB will deviate very little from its current price, $25.25.