Sizing Up Sentiment Extremes on the South Korea ETF

EWY put options have rarely priced in steeper volatility premiums relative to calls

Oct 31, 2017 at 9:01 AM
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The iShares MSCI South Korea Capped ETF (EWY) is having a better 2017 than most of the major U.S. equity-based exchange-traded funds (ETFs), up more than 38% year-to-date as of Friday's close. In fact, EWY registered a new 10-year high to end the week, topping out at $73.64 on an intraday basis.

The runaway rally in EWY may come as a surprise to those who have followed the breathless (and seemingly endless) headlines warning of an imminent nuclear strike by South Korea's contentious neighbor to the north. But make no mistake; the low-volatility uptrend in EWY is currently accompanied by a volatility skew that points to a fairly robust degree of anxiety among Seoul-focused speculators.

As of Thursday, 30-day historical volatility on EWY registered a new 52-week low of 9.8%. Meanwhile, as of about midday Friday, Trade-Alert pegged the 30-day at-the-money implied volatility (IV) at 16%, in the 16th percentile of its annual range -- generally speaking, a fairly reasonable premium over the unusually low realized volatility figure.

But looking at the 30-day IV skew for EWY, we find that this metric vaulted on Friday to near-peak levels -- indicating that EWY put option implieds have rarely been steeper relative to their call counterparts. Specifically, EWY's 30-day IV skew rose as high as 41.1% on Friday, in the 99th percentile of its annual range.

Also in the 99th annual percentile is EWY's 50-day buy-to-open put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and Nasdaq OMX PHLX (PHLX), which arrived Friday at 6.55 -- pointing to a clear and extreme preference for bearish options over bullish.

Likewise, short interest on EWY vaulted 53.6% higher over the past two reporting periods to stand at 6.24 million shares. That's the largest accumulation of EWY short interest since January 2016 -- and it's important to note that the short interest peak attained nearly two years ago roughly coincided with EWY's 2016 lows. As the shorts covered their shares in the weeks and months that followed, EWY embarked on the uptrend that has most recently culminated in Friday's new 10-year price peak.

Given EWY's low-volatility climb to new highs in the face of an aggressive campaign by the shorts and heavily put-skewed options activity, the contrarian takeaway is that there's more upside yet to come for this Seoul-based equity ETF. But for those holding EWY shares, we'd advise against picking up put option hedges until the IV skew cools back down from its currently stratospheric heights.

ewy daily price chart 1027

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 29.

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