Options Trading News

October 5, 2012  Fri 2:14 AM CT

One investor thinks that Australian stocks are going to break out or break down.

optionMONSTER's monitoring systems detected the purchase of about 10,000 January 22 puts for $0.62 and 10,000 January 25 calls on the iShares MSCI Australia Index exchange-traded fund for $0.50. Volume exceeded open interest at both strikes, indicating that a new position was initiated.

Known as a strangle, the trade cost $1.12 and will profit from the EWA making a sharp move higher or lower. It will lose money from the fund remaining trapped in a range. (See our Education section)

The EWA rose 0.11 percent to $24.03 yesterday and has spent almost two months trapped at around $24. That level has been resistance going back more than a year, which could be leading some chart watchers to expect a powerful rally if it's broken.

The fund was a favorite among global investors last decade as China snapped up its mineral exports. It has lagged the S&P 500 more recently as growth slows on the mainland.

Policymakers have attempted to increase domestic demand, particularly in its residential housing market, to offset weak demand from abroad. Earlier in the week, for instance, the Reserve Bank of Australia unexpectedly cut interest rates, and now some investors expect further stimulus next month.

Overall option volume in the EWA was 20 times greater than average in the session.
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The art of trading

As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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