All Option Traders' Eyes on UUP $25

The Turkish lira crisis sent the bullish dollar fund gapping higher in August

Sep 4, 2018 at 7:33 AM
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After a rocky start to 2018, the backdrop of a consistently tightening Fed has helped to propel the U.S. dollar out of its first-quarter doldrums. The Invesco DB US Dollar Index Bullish Fund (UUP) has followed suit; from its Feb. 15 year-to-date closing low of $23.13, the exchange-traded fund (ETF) rallied 11% into its Aug. 15 closing high of $25.59. (For those who have grown jaded by the number of fast-moving, cult-following momentum stocks that seem to make those kinds of moves in the space of the average trader's afternoon coffee break, consider that UUP's reigning 52-week high for 120-day historical volatility currently stands at all of 6.5%.)

Since that annual high close a couple of weeks ago, UUP has pulled back into its 50-day moving average, currently located at $25.11 -- right in the same neighborhood where the ETF endured some choppy trading through most of the summer. The period between June 15 and Aug. 1 can be accurately described as a prolonged orbit around the $25 level's gravitational pull, with UUP cycling above and below this level several times ahead of a modest gap higher on Aug. 2, when the currency caught a strong safe-haven bid from an escalation in trade tensions with China.

All other things being equal, that move higher at the start of August might have eventually given way to another cycle back below $25 over the following sessions -- but instead, the Turkish lira crisis sparked a major UUP gap higher on Aug. 10, helping the shares to create some distance between themselves and $25. And judging by the action last week, this latest pullback in UUP appears to have bottomed just north of the $25 level -- at $25.01, in fact, which was the site of last Tuesday's intraday low -- which means this region could potentially be emerging as support.

Adding another layer of technical interest, the nearby $24.92 price point represents a 50% retracement of UUP's prolonged descent from its post-election December 2016 closing high into its February 2018 closing low.

Short-term options traders certainly have their sights set on this price point. In the front-month series, the most popular put is the September 25 strike, with 15,327 contracts -- and the most popular call is also the September 25 strike, with 8,653 contracts. The glut of put open interest could contribute an added layer of structural support here as expiration draws closer, should UUP maintain its footing above this once-troublesome level. (For what it's worth, the most popular October strike is also the 25 put, where there are 11,873 contracts outstanding.)

It's hard to predict which international conflict, crisis, or monetary policy shift might spark the next major move in the dollar in the weeks ahead, but suffice it to say that a big break away from the $25 level's orbit -- whether higher or lower -- could spark a large-scale unwinding on the part of those who have stacked up speculative bets and hedges at this strike price, and that such an unwinding could effectively accelerate the speed and magnitude of the underlying's move.

UUP CotW Aug 31

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 2.


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