WisdomTree Japan Hedged Equity Fund (DXJ) Option Trader Eyes a Quick Bounce

WisdomTree Japan Hedged Equity Fund (DXJ) is down, as the yen surged in the wake of the BoJ's surprise decision

by Karee Venema

Published on Jul 29, 2016 at 2:56 PM

Japan stocks went on a wild ride today, after the Bank of Japan (BoJ) shocked investors with a smaller-than-expected stimulus package. The disappointment sent the yen surging, and by extension, the WisdomTree Japan Hedged Equity Fund (DXJ) -- an exchange-traded fund (ETF) that tracks the movement of Japanese exporters -- is down 1.2% at $40.81. Nevertheless, call volume is soaring in DXJ's options pits, with one speculator eyeing a quick bounce over the next several weeks.

By the numbers, around 205,000 DXJ call options have changed hands -- six times what's typically seen at this point in the day, and within a chip-shot of notching a new annual high. As a point of comparison, fewer than 7,000 put options are on the tape.

According to Trade-Alert, the majority of the action has centered around a 3:1 call ratio spread involving the fund's August 41 and 43 strikes that was initiated for an initial net debit of 18 cents. This echoes similar activity in DXJ's options pits yesterday, and expresses confidence that the shares will rally back up to $41.18 (purchased 41 strike plus premium paid) by the close on Friday, Aug. 19 -- when front-month options expire.

More broadly speaking, options traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have shown a clear preference for calls over puts. In fact, DXJ's top-heavy 10-day call/put volume ratio of 12.61 ranks in the 85th annual percentile, meaning long calls have been initiated over puts at a faster-than-usual clip.

Echoing this call-skewed backdrop is DXJ's Schaeffer's put/call open interest ratio (SOIR) of 0.16, which rests lower than 95% of all comparable readings taken in the past year. Simply stated, short-term speculators have rarely been as call-heavy on the ETF as they are now -- likely due to the the massive influx of new positions initiated yesterday at the August 41 and 43 calls.

Technically, the WisdomTree Japan Hedged Equity Fund (DXJ) has put in an uninspiring performance on the charts over the past 12 months, down 28.5%. More recently, the ETF's rally off its June 27 post-"Brexit" three-year low of $37.05 was quickly halted by its 20-week moving average -- a trendline that has been ushering the shares lower throughout 2016.

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