Highly bullish strategy in German fund
David Russell | [email protected]
optionMONSTER's Heat Seeker monitoring program detected the purchase of about 7,000 March 27 calls on the iShares MSCI Germany Index Fund for an average price of $0.175. Some 3,900 March 25 puts were sold at the same time for $0.30.
The trader paid roughly $5,500 to open the position, which is highly leveraged to further gains in the EWG. If the exchange-traded fund continues to rally, he or she stands to reap huge profits on the calls owned as the puts sold short will become worthless. The opposite will be true in the event of a drop.
While investors often create "synthetic long" positions by selling puts and buying calls, the unusual thing about yesterday's strategy is that more calls than puts were traded. That makes the position more leveraged to the upside than to the downside.
The trader could also be required to buy shares in the fund because of the short puts. But that might not be a problem if he or she is bullish on German equities.
The trade was probably the work of an investor who's missed the rally so far and doesn't want to be left out if it continues. It provides cheap upside exposure while locking in a buy order at $25 in the event of a pullback. (See our Education section)
The EWG fell 0.27 percent to $25.71 yesterday. It's up 27 percent in the last year, more than triple the gains of the S&P 500.
Total option volume in fund was 16 times greater than average, according to the Heat Seeker.