Emerging market ETF sees bearish option action-analyst

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April 2, 2009 4:48pm ETF BASIC NEWS


By Doris Frankel

 CHICAGO, April 2 (Reuters) – Many option traders on Thursday appeared to be betting the share gains in an emerging market exchange-traded fund will be short-lived and aggressively bought puts and sold calls, according to one analyst. 

Shares of the iShares MSCI Emerging Market fund EEM.P rose 5.42 percent, or $1.39, to close at $27.04. 

In all, about 137,000 puts and 116,000 calls changed hands in the ETF, above its daily combined volume of 154,000 contracts, data from option analytics firm Trade Alert show. 

“The trading pattern on the emerging markets ETF was bearish except for one investor, who went against the grain today,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, in a note to clients.

 Investors often use equity puts, which allow them to sell the security’s shares at a given price and time, to protect stock holdings or to speculate on a stock’s future weakness.

 Call selling is often viewed as a neutral to bearish strategy. A call seller is obligated to deliver the stock at the fixed strike price in exchange for the premium received.

 At the April $25 strike price, about 30,500 EEM puts were purchased for an average premium of 48 cents each, while the June contract attracted investors looking for protection at even lower strikes, he said.

 Wilkinson also said at the June $21 strike price, 10,000 puts were picked up for 66 cents apiece whereas 5,000 puts were bought at the June $24 strike for $1.37 apiece.

 Call options were also sold in heavy volume, with 5,000 lots shed at the same $24 strike for $4.45 as some traders were seen booking gains on the current rally in the stock’s price, he said.

 Similarly, he noticed that 10,000 calls were shed at the now in-the-money June $27 strike for $2.55 per contract.

 Wilkinson said some investors do not see the rally continuing through $31 by expiration in June as 32,500 calls were sold at the June $31 strike price for 90 cents apiece.

 But one investor supported the fund’s gains by selling 25,000 puts at the June $24 strike for $1.32 each to fund the purchase of 25,000 calls at the June $29 strike price for a premium of $1.64, he said.

 This trader established a bullish call position at the June $29 strike and vastly reduced the outlay to just 32 cents a contract by selling the same amount of June $24 strike puts.

 The investor would begin to realize profits at a share price of $29.32 by June expiration, he said. (Editing by Jan Paschal)

Source: reuters.com

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