How to cash in on the China rally: Trader

How to cash in on the China rally: Trader
How to cash in on the China rally: Trader   

China's stock market is looking hot once again.

The Shanghai composite surged nearly 6 percent Thursday, rebounding from year-to-date lows and seeing its biggest one-day gain in six years. And as far as one trader is concerned, the rally could continue over the several weeks.

"I think we're poised for an even bigger rebound here," technical analyst and options expert Andrew Keene said Thursday on CNBC's "Trading Nation."

Harsh selling in the past month has sent the world's second-largest stock market tumbling, with the Shanghai composite and FXI falling a respective 28 and 16 percent. But Keene notes the charts are now testing key support.

An investor watches an electronic board showing stock information at a brokerage office in Beijing, July 9, 2015. China shares rebounded sharply Thursday, with the Shanghai composite index posting its biggest percentage gain in six years.
Kim Kyung-Hoon | Reuters
An investor watches an electronic board showing stock information at a brokerage office in Beijing, July 9, 2015. China shares rebounded sharply Thursday, with the Shanghai composite index posting its biggest percentage gain in six years.

Read MoreThree charts explaining China's strange stock market

Looking at a one-year chart of the FXI, Keene noted that the ETF was stuck in a tight range from November to April. "After we broke out of that range we saw a straight line up to new highs, consolidated and then sold off," said Keene, founder of Keene on the Market. The FXI is now down more than 20 percent from its high set in late April. "I think we've seen a bottom."

And according to Keene, the ETF has the potential to rally as high as $45 through August.

So to make a bullish bet he turned to the options market. Specifically, he bought the August 44/45 call spread for 25 cents. Since this is a bullish strategy where a trader will buy a call and then sell a higher strike call in the same expiration to offset the cost, Keene's trade is profitable if the FXI rises above $44.25 by August expiration. That's an 8 percent rally from current levels.

"If the FXI rises to my target of $45, the cost of this spread would increase to $1 and I could make 300 percent of my money in the next 47 trading sessions," added Keene. "I think this is a great risk-to-reward setup to get long China."

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