Are Japan ETF options too expensive?
David Russell | email@example.com
optionMONSTER's tracking systems detected the sale of 35,000 December 8 puts in the iShares MSCI Japan exchange-traded fund for $0.06. Volume was more than 4 times the open interest in the strike at the start of the day, indicating new positioning. The trade, which was one of the largest in the market during yesterday's session, followed similar activity one day earlier.
The investor is betting that the EWJ will remain above $8 through late 2012. If that turns out to be right, those puts will become worthless and the trader will keep the $0.06 as profit. If the bet is wrong, he or she could be forced to buy the stock at the strike price and face potentially huge losses.
Option pricing appears to be a major part of the strategy because it is anticipating a bigger move than the EWJ has made in recent months. Implied volatility is around 18 percent, while the fund has fluctuated only about 14 percent. Selling puts is a common way to make money from a perception that premiums are too high. (See our Education section)
The EWJ, which fell 0.44 percent to $9.10 percent yesterday, has been trading in a narrow range since May. The fund hasn't seen $8 in more than three years, which is probably giving the investor confidence that it will stay above that level in coming months.
Overall option volume the fund was quadruple its daily average.