Some options traders are betting the euro will weaken against the dollar and that stock-market volatility will rise in coming months, according to industry research.
“With the recent volatility in the euro and U.S. dollar, we have seen quite a bit of options activity in CurrencyShares Euro Trust (NYSEArca: FXE),” said Paul Weisbruch, vice president of ETF/options sales and trading at Street One Financial
He said buyers of put spreads appeared in the euro ETF on Thursday and “seem to be bracing for additional weakness in the euro in coming months.”
Investors have been watching the euro because it has been highly correlated with U.S. stocks recently. If euro ETFs are rising, then chances are equities are rising too.
“FXE has declined over 5% off its highs touched in early May,” Weisbruch wrote in a strategy note Friday. “Yesterday’s put activity contrasts with call buyers in FXE we saw earlier in the week whom seem to be looking for a bounce in the euro.”
The euro rose Friday along with SPDR S&P 500 ETF (NYSEArca: SPY) as the debt crisis in Greece and other financially-strapped countries in Europe dominated the headlines.
The CBOE Volatility Index also eased back somewhat after Thursday’s spike, when options were active as well. Options traders “are probably hedging an equity portfolio against a further spike in volatility going into the early fall,” Weisbruch remarked. [Stocks Take Sharp Turn Lower, VIX ETFs Soar]
One investment newsletter that trades ETFs on Friday said the move lower in the S&P 500 the previous session triggered the closure of a number of long positions.
“The breakdown attempt has reversed today but in light of recent moves it could just be another trap. The index has been volatile for the past few weeks, with head fakes in either direction,” said Tarquin Coe, technical analyst at Investors Intelligence.
“We shall not chase today’s bounce and will trade defensively for the time being. The market is oversold but often the most violent washouts occur under such circumstances,” he added.
The analyst suggested an equity income-oriented ETF, iShares Dow Jones Select Dividend (NYSEArca: DVY), as a defensive option to consider.
SPDR S&P 500 ETF
