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Time to Get Bullish on China?

Brian Stutland | President, Stutland Equities and CNBC Contributor
Wednesday, 7 Nov 2012 | 4:02 PM ET

On Thursday, just days after Americans took to the polls and re-elected President Barack Obama, the 18th National Congress of the Chinese Communist Party is set to begin and will result in a new ruling elite.

4 Eyes Photography | The Image Bank | Getty Images

Expectations are that Xi Jinping will be named party chief, effective next March. And traders are taking notice — we have been seeing heavy options activity in the China 25 Index ETF . (Read More: China at a Turning Point Amid Leadership Change.)

On Wednesday, one trader sold 19,875 December 36.5-strike puts for $0.68 each, and bought 13,250 December 38-strike calls for $1.02 each.

The idea behind this spread is to gain long exposure to the FXI via long calls, but to offset the cost of buying those calls by selling puts. This spread was done for a net cost of zero, and will profit if FXI is above $38 at December expiration, which is in 44 days.

Why might now be the time to get bullish on China?

Well, the case for China centers around better-than-expected economic data released this month, as well as on hopes that the leadership will tackle some of the many problems facing the country. (Read More: China's New Leaders-the Lineup.)

China reported third quarter GDP in line with estimates at 7.4 percent, but new estimates for growth have been revised up from 7.4 percent to 8.1 percent in the fourth quarter, and up to 9 percent for the first half of 2013.

The catalyst for rising growth estimates has been China's trillion-dollar-plus stimulus in the past months. Some expect that when new leaders come to power following the National Congress, more stimulus will be announced in order to maintain China's rapid growth rate.

If you are looking to play a pop in the FXI following the once-in-a-decade National Congress, this spread is worth considering. Keep in mind that if FXI drops below $36.50, this trader will be "put" the stock, and therefore must be a willing buying it at this level.

Given Wednesday's market sell-off, you can leg into this trade at pretty good levels. And when I look at the FXI charts, I do see technicals that appear to be strong.

Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."

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