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business newsOctober Call Buyers in UUP Make Tidy Profits Going Into Holiday Shopping Season
The bullish US dollar trade may have some legs and may be attracting a new crowd of speculators and/or investors at this juncture.
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On October 18, my firm published a note to our clients in our Seeking Alpha instablog titled UUP and GLD, Like Looking in a Mirror, which reflected on the tremendous surge in trading interest in PowerShares US Dollar Index Bullish (UUP). The activity swelled once more over subsequent trading sessions following the original mention, causing us to publish a piece in Minyanville titled Retail Companies, ETFs to Watch If Dollar Appreciation Continues.
During this time frame, UUP traded in the $22 range, and actually temporarily dipped below $22, while institutional investors scooped up hundreds of thousands of upside call options across various months (December, January, and March primarily), and trading volume in the underlying ETF surged to unprecedented heights for the product. Since this last mention of UUP on October 28, the ETF has rallied as much as 4%, trading at a recent multi-month high of $23.52 before settling back in a bit in the past two trading sessions. In short order, it appears that the call buyers were directionally correct in UUP, and in a big way, as one can see from the chart below that the trend in the ETF (and the US dollar) has been nothing but up since the dip below $22 in October.
My firm also pointed out the potential rising fortunes of a handful of retail-related equities and ETFs that would potentially benefit in an appreciating US dollar scenario, including Walmart (WMT), Dollar Tree (DLTR), Costco (COST), Target (TGT), Retail HOLDRs (RTH), PowerShares Dynamic Retail (PMR), First Trust Cons. Discret. Alph (FXD), and SPDR S&P Retail ETF (XRT) to name a few. Costco and Target have performed exceptionally strongly, with Costco closing at its highest levels since 2008 recently and Target impressing even moreso and closing at levels not seen since 2007. Retail ETFs such as PMR, XRT, and RTH are either trading at new 52-week highs or flirting with new highs on the strength that has rippled through many retail-related equities, which in many cases is likely attributable to the rising US dollar scenario along with a number of other fundamental factors. To put it in context, since October 28, the S&P 500 is up approximately 3% with RTH returning 5% and PMR surging nearly 9% during that same time frame. So it seems for now that the appreciation in the US dollar is providing a nice headwind for many individual equity names across the retail sector.
While options activity, in particular the surge in call buying, has calmed down considerably in UUP, the ETF has consistently traded a multiple of its average daily volume on a daily basis rather regularly throughout the month of November, indicating that perhaps the bullish US dollar trade has some legs and may be attracting a new crowd of speculators and/or investors at this juncture.
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