Big Options Volume in ETFs

Yesterday I highlighted the massive call buying in the PowerShares DB US Dollar Bullish ETF (UUP) ahead of the Fed announcement. Here are a few more trades that came across the SideWinder screen on Wednesday:

Health Care SPDR ETF (XLV): $28.68 up $0.48 or 1.70%. Volume: 1.82 million shares

Dec09 30.00 Calls: volume over 11,052, trading last: $0.20 OI: 19,382

Dec09 28.00 Calls: volume over 11,025, trading last: $1.15 OI: 11,473

XLV is the SPDR Healthcare Sector ETF. This looks like a call spread buyer for 11,000. This is a sector entering its own secular bull run as boomers will increase demand for healthcare products and services for the next 10 years.

iShares MSCI Brazil Index (EWZ): $72.57, up $1.55 or 2.19%. Volume: 22.63 million shares

Dec09 65.00 Puts: volume over 31,420, trading last: $2.04 bid: $2.03 ask: $2.09 OI: 29,925

Dec09 70.00 Puts: volume over 15,353, trading last: $3.50 bid: $3.55 ask: $3.70 OI: 7,326

EWZ is the iShares MSCI Brazil Index ETF. Here we have a put spread buyer, likely seeking some protection below $70 after this market more than doubled from its March lows. Notice also that this spread was done as a 2 x 1 ratio, thus letting the buyer actually collect a credit of about 50 cents if they bought the 70 put once and sold two 65 puts. This would be a mildly bearish play and would have unlimited risk below $65.

A more aggressive bearish play in this put spread would be if it were done as a “backspread,” where more options were bought than sold. In that case, the trade would have sold the 70 put once and bought the 65 puts twice, for a net debit of 50 cents. This strategy would have suffered a loss on the short 70 put until $65, and then have unlimited profit potential below $65.

ProShares UltraShort 20+ Year Treasury ETF (TBT): $47.72, up $0.74 or 1.58%. Volume: 8.81 million shares

Nov09 50.00 Calls: volume over 31,729, trading last: $0.37 OI: 21,444

Dec09 52.00 Calls: volume over 10,169, trading last: $0.67 OI: 4,017

TBT is the ProShares Ultra Short 20+ Year Treasury ETF. The fund is designed to capture 2x the inverse of the Barclays Capital 20+ Year U.S. Treasury Index. Investors here may have been using this vehicle to hedge against (or speculate for) an unfavorable move in the Treasury yield curve before the Fed announcement yesterday. In other words, if they were concerned about a sudden rise in rates, buying these calls would be one way to hedge or speculate on that event.

ETFs and Options: How to Follow the Big Money

Big option volume in ETFs is indicative of institutional traders—be they mutual funds, hedge funds, or other portfolio managers—trying to shift exposure, re-balance assets, or simply hedge an existing position.

Earlier this week, I attended a great seminar by State Street Global Advisors on “Portfolio Construction Using ETFs.” In addition to picking up ideas for my (free) monthly webinar series “Sector Rotation with ETF Options,” I got a good sense of the depth of institutional involvement in these products.

Here’s one dramatic snapshot of why they use ETFs for diversification and efficient market exposure. In 2008, one of the worst-performing market areas was Emerging-Market Stocks, down more than 53%. And this happened after it was the star in 2007 with a 40% return. This year as of 2Q09, EM leads all other large-asset classes in stocks and bonds, up 36%.

When the credit crisis sent the world to sell everything last fall, EM got hit the worst. Who knew when it was safe to buy risky stocks again? Buying the iShares MSCI Emerging Markets Index (EEM), was one relatively safe way to buy the worst-performing market area that was bound to bounce back.

The EEM, probably one of the largest ETFs with over $12 billion in assets, is up 53% this year and holds stocks from China, Brazil, South Korea, Taiwan, South Africa, India, Hong Kong, Russia, and Mexico in about 80% of its coverage.

A 53% return doesn’t bring you back to flat if you were long those issues last year, but it’s still an outsized gain this year across a broadly diversified mix of countries and economies still benefiting from the global boom and high single-digit growth.

The Vanguard Emerging Markets ETF (VWO) is also a good alternative tracking the same MSCI index. I believe it has very low expenses, has returned 61% this year, and invests in 550 stocks around the world. It also trades good average volume of 10+ million shares per day.

For more ideas about ETFs, be sure to visit my friends at www.ETFDesk.com.

“Mind the Risk, Bank the Profits!”