Call Buyers Blitz U.K. ETFs EWU and VGK

U.K. ETFs iShares MSCI United Kingdom ETF (EWU) and Vanguard FTSE Europe ETF (VGK) have seen bullish options betting ahead of the 'Brexit' vote

Jun 17, 2016 at 2:09 PM
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Amid escalating uncertainty about the U.K. "Brexit" referendum on June 23 -- where Brits could vote themselves out of the European Union (EU) -- investors last week pulled $1.1 billion from U.K. equity funds, marking the second-largest weekly withdrawal in a decade, according to BofA-Merrill Lynch. Meanwhile, exchange-traded funds (ETFs) like the iShares MSCI United Kingdom ETF (EWU) and Vanguard FTSE Europe ETF (VGK) have been battered in June, and as of yesterday were approaching "oversold" territory. However, the tragic death of British lawmaker Jo Cox has put "Brexit" campaigning on hold, sparking bullish options betting on EWU and VGK today.

EWU shares hit a three-month low in intraday action yesterday, before shifting gears to end the day higher. Today, the ETF is up another 1.9% at $15.56, and call options are flying off the shelves at 30 times the average intraday clip. In fact, call volume has already more than doubled the 52-week high of about 34,000 contracts on June 10, with 73,000 calls traded already today. As such, EWU's 30-day at-the-money (ATM) implied volatility (IV) just hit an annual high.

Most of the action has transpired at the ever-popular, soon-to-be front-month July 16 call, where more than 70,000 contracts traded. A healthy portion of the calls seem to be of the buy-to-open variety, meaning the buyers expect EWU to climb back atop $16 within the next month. Delta on the call is 0.34, implying a roughly 34% chance of the option expiring in the money.

Today's appetite for iShares MSCI United Kingdom ETF (EWU) calls is just more of the same, though. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF's 10-day call/put volume ratio of 2.99 indicates that nearly three calls have been purchased to open for every put in the last couple of weeks.

VGK shares also hit a three-month low yesterday, but ultimately ended in the black. The ETF was last seen 1.5% higher at $46.76, and option buyers are apparently betting on even more upside after the "Brexit" vote next week (which is also impacting banking stocks). 

Roughly 12,000 VGK calls have traded today -- six times the norm -- compared to fewer than 400 puts, sending the security's 30-day ATM IV to a new annual high. Again, almost all of the action has transpired at a single strike: the July 47 call, in this instance, with more than 11,300 contracts exchanged. Buyers of the calls expect VGK to reclaim a perch atop $47 within the next month. Delta on the call sits at 0.48, implying the odds of expiring in the money are roughly that of a coin flip.

As with EWU, Vanguard FTSE Europe ETF (VGK) calls have been the options of choice among buyers during the past two weeks. On the ISE, CBOE, and PHLX, the ETF sports a 10-day call/put volume ratio of 2.17. Furthermore, its Schaeffer's put/call open interest ratio (SOIR) sits at 0.22, indicating that near-term calls more than quadruple puts. This ratio sits lower than 99% of all other readings from the past year, underscoring the extreme near-term call bias of late.

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