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Unusual Option Activity

On Friday we saw options traders continue to gain long exposure to US financials and emerging markets, all of which are likely to appreciate as a result of QE3, but also noticed traders hedging themselves against the current trend of a weakening US dollar and rising S&P 500.

We saw 101,039 XLF Oct. 17 Calls trade on the ask for $0.12 as the ETF broke out to a new 52-week high. Friday’s put-call ratio in this ETF was 0.124, showing that traders are definitely expecting a continued move to the upside. This trade profits if XLF is above 17.12 at October expiration in 32 days, a 5% move higher from Friday’s close. We also saw 54,087 EEM Oct. 43.5 Calls trade above the ask for $0.744. This trader is betting that EEM will be above 44.244 at October expiration, a 4.5% move higher from Friday’s close.

In contrast to these bullish bets, we saw a trader buy 25,890 IWM Nov. 82 puts at the ask for $1.34 and finance this by selling an equal number of Nov. 78 puts for $0.66. The net cost of this trade is $0.68, and it profits if IWM is below 81.32 at November expiration. The motivation behind this trade is likely protection for a long stock portfolio heading into the election.

Another trader sold 13,161 UUP Oct. 22 calls on the ask at 0.109. UUP, the Powershares US Dollar Index Bullish Fund, has been down for the past four weeks in a row, so this is likely a trader selling a call against a long stock position to reduce positions downside risk.

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