Option Bulls Circle Japan ETF Ahead of Election

EWJ has seen a rare spike in call buying recently

Oct 16, 2017 at 2:45 PM
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The iShares MSCI Japan ETF (EWJ) is fresh off a 10-year high of $57.69, after Japan's Nikkei touched another 21-year high. The exchange-traded fund (ETF) has added 4.4% just in the past month, shaking off its North Korea jitters from August, and EWJ options traders have been betting bullishly ahead of Japan's snap election this weekend.

Today, the fund has seen roughly 34,000 call options change hands -- six times the norm, and more than three times the number of EWJ puts exchanged. Call volume on the ETF is now pacing for the 99th percentile of its annual range, after peaking at nearly 54,000 contracts on Friday.

Specifically, on Friday, traders apparently bought to open weekly 10/27 57.50-strike calls, which saw the biggest open interest change over the weekend, with more than 12,600 contracts added. By purchasing the calls to open, the buyers expect EWJ shares to continue their trek north of $57.50 through Oct. 27, which encompasses the aforementioned Oct. 22 election.

Today, speculators are looking a little further out, and betting even more bullishly, with the November 59 call accounting for more than 21,000 of the contracts traded. Most of the action transpired in one fell swoop, with a block of close to 21,000 calls apparently bought to open for $0.23 apiece, or roughly $483,000 (100 shares per option x number of options), per Trade-Alert. In order to profit, the buyer needs EWJ to muscle atop $59.23 (strike plus premium paid) -- in territory not charted since March 2007 -- by November options expiration.

The recent appetite for EWJ calls runs counter to the trend seen on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where speculators have bought to open more than four puts for every call on the ETF during the past two weeks. Going out 10 weeks, the fund's 50-day put/call volume ratio sits at a lofty 6.09 -- higher than about four-fifths of the past year's readings.

Currently, polls indicate that Prime Minister Shinzo Abe is most likely to win the Oct. 22 snap election he called, and defeat Tokyo Governor Yuriko Koike. But, as we saw with the surprise election victory for Abe's friend Donald Trump back in November, and like we saw with British Prime Minister Theresa May's snap election in June, sometimes the polls are wrong.

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