One fund is pacing toward its worst month in years
The stock market is taking a big hit this week, after several Chinese media outlets suggested Beijing could restrict the export of rare earth minerals, which are used in a variety of products, including smartphones and hybrids. Options traders are reacting to the latest salvo in the U.S.-China trade war by blasting the SPDR S&P Metals and Mining ETF (XME) and VanEck Vectors Rare Earth/Strategic Metals ETF (REMX), with both exchange-traded funds (ETFs) making notable moves on the charts.
Call Buying Popular as XME Pans New Lows
Precious metals mining fund XME was last seen trading down 0.8% at $25.06, earlier tagging a new two-year low of $24.80. Since topping out at a four-month high of $32.35 in late February, the shares have shed 22.5%, and are pacing toward their worst month since September 2015, down 13.2% so far.
This latest slide isn't concerning today's options traders, with 9,774 calls on the tape so far -- five times what's typically seen at this point, and eight times the number of puts traded. The July 27 call is most active, and it looks like new positions are possibly being purchased for a volume-weighted average price of $0.22. If this is the case, breakeven for the call buyers at July options expiration is $27.22 (strike plus premium paid).
More broadly speaking, the June 31 call is home to peak open interest of 17,725 contracts. Data from Trade-Alert indicates the bulk of these contracts were bought to open in mid-March, when XME was trading near $30. Regardless of where the fund settles at expiration, the most either set of call buyers stands to lose is the initial premium paid.
REMX Options Traders Set Short-Term Ceiling
Rare earth and strategic metals and minerals ETF REMX bottomed at $13.34 on May 13 -- its lowest mark since Jan. 2 -- but has since climbed 15% to trade at $15.35, up 3.4% in today's trading. What's more, the shares are on track to close north of their 120-day moving average for the first time since April 17.
Speculators are making a beeline toward REMX's typically quiet options pits, with 3,241 calls and 437 puts exchanged today -- three times the expected intraday amount. This accelerated options trading just echoes a recent trend, with total options volume topping out at an annual high on May 21, when 8,122 contracts were traded in a single session.
Today, traders may be liquidating their now in-the-money June 15 calls, while other speculators appear to be initiating new positions at the July 17 call. The bulk of these back-month calls have crossed at the bid price, suggesting they were sold. In this scenario, call writers expect the $17 level to serve as a short-term ceiling for REMX over the next seven weeks.