Invest Globally, Profit Locally

By Bryan Perry

We can trade options on thousands of U.S. stocks, indexes and exchange-traded funds (ETFs). But with America's growing interest in trading foreign stocks, how can an options trader take advantage of -- and profit in -- the international stock market?

---

We're playing the options markets for profits in Bryan's Tactical Trader service, with a healthy balance of put and call options in names that have some serious movement in store. Click here and get in on this week's options trade!

---

One region receiving a lot of attention is Asia -- particularly China and India, which Wall Street also refers to as "Chindia." These emerging markets have caught the attention of many traders, both those who are bullish on continuing growth in these areas as well as bearish investors who want to be positioned for a global market sell-off.

Options traders are equipped to use calls to ride stocks to new highs and to buy puts to make a downside bet. But despite plenty of option trading opportunities in domestic stocks, options on foreign stocks might not be as easy to come by and they might end up costing you a pretty penny (or Euro, Yen, Yuan, etc).

Keep in mind that when you purchase stocks on overseas markets, such as the Shanghai Composite or the Hang Seng, you are buying stocks in the local currency. Although your account will be debited in U.S. dollars, ultimately those dollars must be converted and given exchange and commission fees.

Also, given that options premiums are based on the price of the underlying stock, volatility and time, among other factors, the premiums for foreign options can become inherently more expensive.

It's also important to note that, after the host of U.S. corporate scandals, the Sarbanes-Oxley Act came into play to keep domestic companies honest and investors in the clear. But those accounting regulations only apply to U.S. companies, and stocks that are listed on foreign exchanges are not obliged (or even expected) to follow the same regulations. This is especially true in China, where many companies are government outfits.

However, you can reduce your risk by playing foreign stocks by buying options on them in the domestic markets.

The easiest way to do this is by purchasing bundles of foreign stocks safely through ETFs. These are created by firms that are willing to assume the risk of buying the underlying stock, while you sit back and leverage your position with options. This way, you are investing in a basket of stocks, but with one single transaction to make a sector play.

But, if you're not interested in researching all of the companies in a particular ETF -- as there are hundreds of ETFs to choose from and each contains approximately 20 stocks -- and instead have one company in mind for purchasing options, you can look into American Depositary Receipts (ADRs).

With ADRs, foreign companies can trade on their home exchanges but also maintain separate securities on U.S. exchanges by committing to domestic listing and accounting regulations. But, just because a foreign company is transparent and adheres to accounting regulations doesn't mean its underlying price won't decline in sympathy with trading activity in its home market.

Best of all, though, finding options for ADRs is as easy as finding them for domestic stocks.

While domestic markets offer a seemingly unlimited amount of "options" for traders, you can satisfy your craving for some international flavor without having to stay up all night, watching your portfolio to see what happens during the overseas trading day!