How traders build and manage options strategies: an example using a China tech ETF

How traders build and manage options strategies: an example using a China tech ETF

Options 10 minutes to read
Koen Hoorelbeke

Investment and Options Strategist

Summary:  Understanding how traders select stocks, strikes, and expirations is key to building a solid options strategy. Using a China tech ETF as an example, this article explores the decision-making process behind trade selection, risk management, and strategy adjustments in a high-volatility environment.


How traders build and manage options strategies - an example using a China tech ETF

China’s internet stocks are back in the spotlight

China’s internet stocks are back in the spotlight. Just this week, options traders flooded into bullish call positions on KWEB (Kraneshares CSI China Internet ETF), betting on continued upside after Beijing’s latest economic stimulus efforts. More than 20,000 contracts of the $38 call expiring this Friday were bought, as KWEB surged over 4% in a day.

Understanding how traders approach stock selection for options strategies is a key learning point. The focus here is on volatility, liquidity, and market conditions—all crucial elements in structuring a trade. We will break down how traders select an underlying asset, determine strike prices, choose expirations, and manage risk. To illustrate, we will use KWEB as an example.

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Selecting an underlying asset

A historical chart showing KWEB’s implied volatility, highlighting its current IV rank of 44.09% © BarChart

When traders select an underlying stock or ETF for an options trade, they typically look at:

  • Volatility: Stocks with higher implied volatility (IV) provide higher option premiums.
  • Liquidity: A stock with higher trading volume and open interest ensures smooth order execution.
  • Market conditions: Broader trends, catalysts, and sentiment affect price stability or movement.

KWEB, the KraneShares CSI China Internet ETF, was chosen because:

  • It provides exposure to major Chinese internet companies, including Alibaba, Tencent, and Meituan.
  • It has been on an uptrend, making it a candidate for either directional or neutral strategies.
  • It has elevated implied volatility (IV rank of 44.09%), making it a prime choice for premium-selling strategies.

Choosing the right options strategy

Once an asset is selected, the next step is choosing the right options strategy based on market conditions and expectations. Traders generally consider:

  • Range-bound movement? Sell options to take advantage of time decay.
  • Directional conviction? Buy calls or puts, or use vertical spreads.
  • Volatility expectations? High IV suggests selling options; low IV suggests buying options.

For this example, we examine a short strangle, a trade that benefits if KWEB stays within a certain price range.

Structuring the trade: strike, expiry selection, and risk considerations

An option chain for KWEB, showing strike prices, implied volatility, and open interest, used for selecting the strangle strikes © Saxo

A short strangle involves selling an out-of-the-money (OTM) put and call to collect premium. Here’s how a trader might select the strikes:

  • Expected move calculation: The ATM straddle suggests a $3.90 expected move over the next 30 days.
  • Strike selection: Choosing strikes just outside this range increases the probability of profit.
  • Liquidity check: Selecting strikes with high open interest ensures smoother order execution.

For KWEB, this translates to:

  • Selling the 35 put (April 2025 expiry) (obligating the seller to buy KWEB at $35 if assigned)
  • Selling the 43 call (April 2025 expiry) (obligating the seller to sell KWEB at $43 if assigned)
  • Premium received: $1.25 ($125 per contract)
  • Breakevens: $33.75 (downside) and $44.25 (upside)

This setup has a statistically favorable probability of profit, as long as KWEB remains between $35 and $43 by expiration, since the strikes are positioned just outside the expected move and benefit from time decay.

Understanding risk: max profit and max loss

A risk graph illustrating the profit and loss zones for the KWEB short strangle, with breakeven points and maximum risk areas © Saxo

One of the most important considerations when trading options is understanding potential risk and reward.

  • Max profit: Defined and corresponds to the premium received. In this case, the maximum potential profit is $125 per contract. However, many traders choose to take profits earlier—often between 40% and 60% of max profit—to reduce time in the market and limit exposure to unpredictable moves.
  • Max risk: This trade has undefined risk in both directions:
    • Downside risk: While theoretically, the ETF could go to zero, this is extremely unlikely given that it holds multiple major Chinese companies.
    • Upside risk: Theoretically unlimited, but ETFs tend to move less aggressively than individual stocks, making extreme spikes rarer.

Traders should always assess whether they are comfortable with the risk profile before entering an undefined risk trade.

Managing risk and trade adjustments

Since options strategies require active management, traders need a real-time monitoring plan to address potential risks. If the underlying moves too much, adjustments may be necessary:

  • If KWEB rallies above 43: A trader might roll up the put (e.g., from 35P to 38P) to collect more premium or convert the trade into an iron condor to cap risk.
  • If KWEB surges way over 43 (f.e. to 50): A trader might close the short call, roll it to a later expiry, or hedge with shares.
  • If KWEB drops below 35: Adjustments like rolling the call lower or shifting to a delta-neutral hedge could be considered.

By monitoring delta, IV changes, and breakevens, traders can stay ahead of risks before they become problems.

Alternative strategies for different outlooks

Traders with a different market view might consider alternative strategies:

  • Bullish outlook? A bull put spread (e.g., selling the 38P and buying the 35P) provides a risk-defined way to profit if KWEB trends higher.
  • Bearish outlook? A bear call spread (e.g., selling the 38C and buying the 41C) can generate income if KWEB struggles to move higher.

Choosing the right underlying for learning undefined risk strategies

For traders new to undefined risk strategies, the choice of underlying can make a significant difference. KWEB was selected as an example due to its lower nominal value compared to ETFs like SPY, making it a more approachable vehicle for learning. While the nominal value is lower, it is important to recognize that KWEB can still be volatile, and any undefined risk trade carries inherent risks.

Final thoughts

Understanding how to select stocks, structure trades, and manage risk is critical for any trader. Using KWEB as an example, we’ve outlined how market conditions influence strategy choice, how traders determine strike prices, and how risk can be managed through adjustments.

While this short strangle benefits from time decay and high IV, it’s crucial for traders to stay proactive—monitoring market movements and making adjustments as needed.

Was this breakdown of trade selection and risk management helpful? Let me know your thoughts or if there's another approach you'd like to explore!


Stay connected! You can follow my latest insights on my social media account at BlueSky


Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.