2 ETFs Flooded By Option Bears Amid North Korea Threats

Threats from North Korea are triggering put buying on South Korea and Japan ETFs

Aug 10, 2017 at 1:53 PM
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Amid escalating threats between the U.S. and North Korea, speculators are dumping South Korean and Japanese stocks at a rapid-fire rate. South Korea is widely considered the most at-risk of an attack by its northern neighbor, and people in Japan are allegedly making a run on bomb shelters and air purifiers, as previous North Korean missile tests have landed close to the country. Against this backdrop of mounting fear -- as evidenced by today's CBOE Volatility Index (VIX) -- the iShares MSCI South Korea Capped ETF (EWY) and the iShares MSCI Japan ETF (EWJ) have plummeted from post-financial crisis highs, and options traders are rushing to place bearish bets on the exchange-traded funds (ETFs).

South Korea ETF Pacing for Worst Week Since January 2016

Since peaking at $71.78 on July 24, the EWY has taken an 8% nosedive, last seen trading around $66.02. Shares of the fund are now trading below their formerly supportive 50-day moving average, and are pacing for a weekly loss of 4.6% -- their worst week since January 2016, and just the second time since late 2015 they've been headed for a drop of at least 4% in a week. What's more, this will be EWY's first monthly loss of 2017.

south korea etf ewy chart

As such, EWY options traders have been coming out in full force. Put volume yesterday topped 20,000 contracts, marking the highest since mid-May. That's more than doubled already today, with 56,000 puts traded thus far -- 19 times the average intraday clip, and set to top the aforementioned high-water mark of May. Much of the action appears attributable to spread activity in the September series, where it looks like one trader may have set up a three-way spread using September 63 and 66 puts, as well as September 69 calls.

south korea etf ewy options
Chart courtesy of Trade-Alert

EWY's Schaeffer's put/call open interest ratio (SOIR) now sits at 3.98, indicating that nearly four times more puts than calls are open on the South Korea ETF, looking at the front three-months of data. This reading sits in the 92nd percentile of its annual range, underscoring that near-term options traders are much more put-heavy than usual on EWY right now.

Bearish Betting Ramping Up on Japan ETF

The iShares MSCI Japan ETF touched a multi-year high of $55.28 on Aug. 1, but is now headed for a fifth straight loss, and has shed 1.7% in the past week -- on pace for its worst week since December. EWJ shares were last seen trading around $54.22, down 0.9% on the day.

japan etf ewj chart

While EWJ options volume hasn't been nearly as intense as EWY's, traders are still rushing to place bearish bets at an accelerated clip. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF's 10-day put/call volume ratio is 9.33, indicating more than nine EWJ puts bought to open for every call in the past two weeks. This reading registers in the 87th percentile of its annual range, pointing to a much healthier-than-usual appetite for bearish bets of late. 

EWJ put options are crossing the tape at six times the average intraday clip today, with roughly 17,000 contracts traded so far -- compared to just over 500 EWJ calls. Most active is the fund's September 52 put, which has seen more than 5,400 contracts change hands, and it appears speculators are buying the puts to open, to bet on more short-term downside for the Japan ETF.

What's more, the EWJ's SOIR already stands at 3.19, indicating near-term puts more than triple calls right now. This ratio is in the 86th percentile of its annual range, suggesting short-term options players are much more put-biased than usual.

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