The $1.35 Million Bet Against the U.S. Dollar

Puts are hot on the PowerShares DB U.S. Dollar Bullish ETF (UUP), ahead of tomorrow's policy announcement from the Federal Reserve

Dec 13, 2016 at 3:10 PM
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The U.S. dollar has been flying high since Donald Trump claimed victory in the U.S. presidential election. The greenback's record-setting run has been echoed in the PowerShares DB U.S. Dollar Bullish ETF (UUP) -- which replicates the dollar's movement against a basket of six global currencies; specifically, the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish Krona, and the Swiss Franc. Since its Nov. 8 close at $25.34, UUP is up 3% at $26.12, and topped out at an annual high of $26.35 on Nov. 23, as the U.S. Dollar Index (DXY) was flirting with 13-year highs. Nevertheless, several pundits are expecting the dollar to slow its roll next year -- a theme seemingly echoed in UUP's options arena today.

At last check, more than 31,000 UUP puts have traded -- four times the expected intraday amount of 6,296, and nearly 29 times the number of calls that have changed hands. Almost all of the day's options activity occurred when a 30,000-contract block of March 26 puts was bought to open for $1.35 million (number of contracts * $0.45 premium paid * 100 shares per contract). This is also the maximum risk on the trade, should the puts expire out of the money at the close on Friday, March 17. Profit, meanwhile, will accumulate on a slide south of breakeven at $25.55 (strike less premium paid).

More broadly speaking, today's put-accelerated action runs counter to what's been seen in UUP's options pits in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 43,906 calls in the last two weeks, compared to 6,841 puts. What's more, the resultant 10-day call/put volume ratio of 6.42 ranks higher than 83% of all comparable readings taken in the past year.

Drilling down, UUP's June 27 call has seen the largest rise in open interest over this time frame, with more than 135,200 contracts added. Next up is the weekly 12/23 26.50-strike call, which saw nearly 35,000 new positions added over the past two weeks. According to Trade-Alert, it seems likely the bulk of this action was of the buy-to-open kind, as traders eye extended gains for the greenback.

However, it's worth noting that some of the recent options activity -- both on the put and call side -- could be hedging ahead of tomorrow's policy announcement from the Federal Reserve, in which the central bank is expected to unveil its first interest rate hike in a year. As such, today's put buyer could be hoping to protect paper profits against a post-Fed move to the downside. Meanwhile, with short interest on the PowerShares DB U.S. Dollar Bullish ETF (UUP) up almost 38% in the past three months, it's possible short sellers have been initiating long calls to hedge their bearish bets.

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