Typically, I don't play with ETFs because I can do a better job trading individual stocks myself and don't need the diversification. But here is something unusual this morning. At 10:19am this morning, a trader went decisively bearish on emerging market, specially Korean stocks. The trader did the following skip-strike butterfly:
- Bought 5,000 contracts of March $46 puts at $1.3 (bid/ask $1.25 x $1.35 at the time)
- Sold 10,000 contracts of March $43 puts at $0.45 (bid/ask $0.45 x $0.55 at the time)
- Bought 5,000 contracts of March $41 puts at $0.30 (bid/ask $0.20 x $0.30 at the time)
The open interest on those strikes is less than 600, so these are clearly opening positions. The butterfly spread was done for net debit of $0.70. This is a $350,000 trade that will produce peak profits of a little over $1 million if EWY falls 8% and trade at $43 on March expiration. Keep in mind that many large institutional investors who have large holdings within individuals stocks, they tend to hedge their positions by buying puts on ETF. I see this with XLF all the time. Samsung has 18.8% weighting in EWY. The second largest is Hyundai at 3.8%. So, whether this is a hedge or a straight bearish bet, if there is going to be a sell-off in Korean shares, it would have to be driven down by Samsung.
I am not able to find who are the largest shareholders of Samsung as they might be the ones potentially hedging with this trade. If you do, please feel free to comment. Samsung alone represents 20% of South Korea's export. It is big enough many regulators have called to break up the company, but that's an old story. If this is a straight bearish bet, I am not sure what the catalyst will be.
Regarding technicals, Interestingly $43 (the body of this butterfly) is the support level and has bounced off from there several times since Sept '09. So, this trade could very well be a bet that it is going back to retest $43 level.
I just did the exact same trade and the order was filled for net debit of $0.60. The P&L and daily charts are attached.
Good luck!
