The ETF to Watch as NAFTA Talks Heat Up

Although calls are cheap relative to puts, EWW options traders have been buying to open puts

Karee Venema
Aug 17, 2017 at 2:18 PM
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Wednesday marked the start of renegotiation talks over the North American Free Trade Agreement (NAFTA) -- as President Donald Trump looks to fulfill one of his campaign promises. In his opening statement, Robert Lighthizer, U.S. trade representative, said Trump "is not interested in a mere tweaking ... and [NAFTA] needs major improvement." The hard line did little to stall the iShares MSCI Mexico Capped ETF (EWW), with the fund that tracks the performance of Mexican stocks holding near annual highs.

Specifically, EWW shares added 0.7% yesterday, and though the exchange-traded fund is down 0.9% today at $56.59, it remains within striking distance of its July 27 annual high of $57.72. Longer term, EWW is up 37% from its Jan. 11 seven-year low of $41.23, even as net outflows in the fund jumped to $822.35 million over that same time frame, according to data from ETF.com.

While the shares have been shooting higher, EWW options traders have been relatively quiet. In fact, just 196,755 contracts make up open interest on the ETF, in the low 33rd percentile of its annual range. As a point of comparison, total EWW open interest hit an 12-month high of 721,072 contracts on Nov. 18, while total option volume topped out at an annual peak of 155,202 contracts traded in a single session on Nov. 9, the day after the U.S. presidential election. Today, fewer than 1,700 EWW options have changed hands so far.

And though the fund's 30-day at-the-money implied volatility skew of 24.2% ranks in the elevated 93rd annual percentile -- indicating calls have rarely been cheaper relative to puts -- options traders have shown a penchant for puts in recent weeks. Drilling down on the past 10 trading sessions, the September 56 put has seen the biggest rise in open interest, with 18,707 contracts added. A similar number of September 56 calls has also been initiated over this time frame, though, suggesting long straddles may have been initiated.

Further down the list are the August 55 and weekly 9/1 52-strike puts, both of which have seen notable buy-to-open activity, according to Trade-Alert. Those initiating the long puts expect EWW shares to be trading below the strikes by the respective expiration dates of tomorrow's close and the close on Friday, Sept. 1. However, given the Mexican ETF's longer-term uptrend, it's possible some of this is a result of traders initiating options hedges against any near-term headwinds.

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