Friday, November 6, 2009

UUP Options Action Reveals Huge Unusual Activity: Someone Desperately Needs Shares to Hedge

UUP was halted yesterday pending the announcement that PowerShares wants to issue more shares due to "investor" demand (this is demand betting that the USD is going up).

A closer look at the open interest of UUP options reveals that huge unusual purchases have been made in the last 30 days in the November 23 call option. Here are the current open interests:

(please click to enlarge)

Please notice that there are nearly 300,000 open positions, much larger than any other contracts, calls or puts. 300,000 options represent 30M shares. The average daily trading volume of UUP is around 3M shares.

This is the 23 call option chart for the last 30 days, please take a look at the marked areas:

This chart shows the action on the 23 call for the last 3 days:

The same activity happened with the Dec 23 calls, in which there are 220,000 open positions:

The buyers of these options have already doubled or tripled their money. In order to hedge for these option positions the options sellers have to hedge by holding the shares (or they can lose their pants if the USD goes up). There is the "investor" demand. No wonder PowerShares has to issue more shares. If these shares are not issued soon, someone out there is in desperate need of shares.

UDN, the bear version of UUP, shows no unusual activity.

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