An interesting story in Thursday’s Wall Street Journal (Marketbeat: “Keeping an Eye On Shanghai” by Matt Phillips) pointed out a relationship between the performance of the Shanghai Composite Index and subsequent movement of the S&P 500 Composite. When the Shanghai Composite last tumbled through its 50-day moving average in April, the S&P 500 followed suit about a month later. The same correlation appears to apply to the upside moves.

This week, the Shanghai Index dropped again, losing 1.9% on Wednesday alone, and getting close to crossing through its 50-day moving average. Technical analysts usually prefer to wait for an event to occur. In this case, seeing the Shanghai Index actually move through the 50-day average before taking a position.

Aggressive option traders sometimes prefer to “jump the gun” believing that to wait leaves too much on the table. Especially with so many factors – i.e. time value, changes in volatility - working against long option positions.

If you fall into the aggressive camp, and who believe that this correlation will repeat, might consider bearish options positions in S&P 500 ETFs like the iShares S&P 500 Index Fund (CAD-Hedged) (TSX: XSP). The latter ETF tracks the S&P 500 Composite index, but is priced in Canadian dollars and as such, hedges currency risk.

Normally, I would discuss a couple of strategies, like going long puts or using bear call spreads. However, because of liquidity concerns with XSP, I would only consider a long put strategy. With XSP currently trading at $13.81, look at buying the December 14 puts at 45 cents.