Options Trader Sets Short-Term Floor for UUP Shares

PowerShares DB US Dollar Bullish ETF (UUP) has been trending lower post-Fed, but one options trader placed a short-term floor for the shares

Mar 22, 2017 at 12:56 PM
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Unlike gold stocks, it's been a tough week for the U.S. dollar, with the greenback struggling since the Fed raised interest rates last Wednesday, and reiterated its intent to shift monetary policy at a gradual pace. After closing at $26.28 on Tuesday, March 14, the day before the Fed rate hike, the PowerShares DB US Dollar Bullish ETF (UUP) has shed 2.1% to trade at $25.72 -- within a cluster of key price points. UUP shares are now trading south of $26 -- home to the 120-day moving average and a 38.2% Fibonacci retracement of the late-2016 rally -- and are hovering around the February lows near $25.70. Nevertheless, one UUP options trader thinks selling pressure on the dollar may be exhausted, in the near term at least.

UUP dollar ETF price chart

Specifically, it look as if one speculator on Tuesday may have liquidated positions at the weekly 3/31 26-strike put, and sold to open three times as many weekly 3/31 25.50-strike puts for $0.04 each, resulting in an initial net credit of $84,000 (21,000 contracts * premium received * 100 shares per contract). This also represents the maximum potential reward for the suspected put writer, should UUP remain north of $25.50 through next Friday's close, when the weekly options expire. Risk, meanwhile, can be quite substantial, should the puts move into the money over the next eight trading sessions.

Looking back to the charts, there are two things in particular working in favor of the put writer. Specifically, a move to $25.50 would fill the exchange-traded fund's (ETF) post-election bull gap -- meaning UUP could find support here -- while this level also coincides with a 50% retracement of the ETF's August-through-January surge. Plus, UUP shares recently breached their lower Bollinger Band, suggesting the ETF is oversold and could be due for a bounce. In fact, data from Schaeffer's Senior Quantitative Analyst Rocky White indicates the break of a lower Bollinger Band has historically been one of the best "buy" signals.

More broadly speaking, though, options traders have been relatively absent on PowerShares DB US Dollar Bullish ETF (UUP). Total open interest on UUP stands at fewer than 367,000 contracts outstanding -- 251,000 calls and 116,000 puts -- lower than 99% of all comparable readings taken during the past year. Outside of the options pits, however, BofA-Merrill Lynch clients think the U.S. dollar is the most overvalued its been since June 2006, and that long dollar positions are the most "overcrowded trade" in world markets.

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