ETF Options Trading

Brian Hicks

Updated July 9, 2008

In Saturday’s Wealth Daily, we told you about our plans to launch our all-options product, near term.  We also told you we’ve been warming up in the free Options Pit blog with some brag-worthy gains, including:

  • Expedia October 22.50 put: 178% in 24 trading days
  • Coca Cola Enterprises November 20 put: 214% in 24 trading days
  • Masco Corporation October 20 put: 75% in 21 trading days
  • Lehman Brothers Holdings October 20 put: 150% in 21 trading days
  • UBS AG September 2008 22.50 put: 165% in 15 trading days

But we’re not just trading individual stock options.  We’re also using ETF options, which is why we recommended buying put options on the iShares MSCI United Kingdom Index (EWU) for further downside potential on June 10, 2008.

Had you bought the October 23 in the money put option (EWUVG), for example, around $1.90, you’re up 58% in less than a month, as the underlying security falls from $23 to $20.

But here’s the beauty of that trade.  There’s further downside in store for the UK economy, meaning higher upside for the held put option.  Here’s why.

No End to UK Job Cuts

On June 10, we said: "A year ago, no one thought it would come to this. Northern Rock and Bradford & Bingley were sailing along nicely, packing mortgages. The Treasury and the Bank of England had no reason to be concerned. Consumers were happy. The economy was growing well, and the Bank was raising rates to slow things down.

But behind the scenes the availability of cheap debt was coming back to haunt the UK.

These days, the Bank of England is reporting that mortgage applications have fallen about 50% over the last year to levels not seen since the early 1990s.

Manufacturing numbers are on the verge on recession. The construction sector is free-falling and services, which account for three quarters of economic output, fell into recession territory.

With inflation preventing the Bank of England from cutting rates, there’s growing fear of stagflation. Unemployment is rising, reducing demand. More banks are in trouble. House prices are falling. And negative equity is stalking homeowners.

Even the Halifax house price index recently fell more than 6%. And house price declines like this only happen when the economy is in recession and unemployment is rising.

The other reason for house price declines is when there’s a loss of monetary policy control. And that’s happening as a result of the credit crunch, which has lessened the availability of credit."

Unfortunately, the pain doesn’t look to subside, as the UK labor market capsizes under a heavy weight of high interest rates, inflation, and historically low levels of confidence.  UK unemployment, as of April 2008, stood at 5.3%.

And it could get worse…

Behind the unemployment stats, layoffs are surging, as corporate profits sink.  According to the Wall Street Journal, UK homebuilders like Barratt Developments and Taylor Wimpey announced that, together, they’d cut 2,000 jobs. 

And close to three-quarters of commercial property agents could cut or freeze staffing over the next year.

Worse, says Howard Archer, a Global Insight economist, (as quoted by the Wall Street Journal), "The U.K. market is deteriorating faster than the euro zone, but Spain, Italy and France won’t be far behind."

ETF Options Trading: What to Buy as the World Goes Mad

If what Archer says is true, not only will we have an opportunity to see further upside with EWU put options, we’ll see upside in puts or short positions with Spanish, Italian, and French ETFs, including the following:

Again, EWU and EWP are just examples of what you can expect from our soon to be released options product.  Enjoy.

And if you’re not familiar with options, or need a refresher, check out our free reports:

Good Investing,

Ian L. Cooper

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