Options Update: Are Option Players Vacating Overseas Holdings?

After briefly showing life and trading as high as 8,517.9, the Dow Jones Industrial Average (DJIA) is down more than 350 points as we head into the final 3 trading hours of the week. For those who may have missed it, futures trading was halted as a drop in futures prompted the invocation of circuit-breaker rules on the Chicago Mercantile Exchange (CME). If you would like to know more about the CME's circuit-breaker rules, where he takes a quick look at when the circuit breakers were triggered in the past.

With all investors focused on the possibility of an economic end time, I decided to study our Intraday Volume Explosion List, not for 1 specific stock, but to see if there were any trading patterns in the options pits. This is a major departure from what is usually covered here in Options Update, but fret not, I did my usual stock analysis.

Here's how this is going to work today: I'm going to take a look at the companies targeted by both bullish and bearish option players to see if we can discern a pattern - or at least something that resembles a trading strategy. So, without further ado ... here we go:

iShares MSCI Emerging Markets International Fund

Are you surprised to see the iShares MSCI Emerging Markets International Fund (EEM | Quote | Chart | News | PowerRating) at the top of both the active put and call charts today? I know that I'm not. According to Google Finance, this exchange-traded fund (ETF) provides results that correspond generally to the price and yield performance of the MSCI Emerging Markets Index. With today's massive drops and activation of circuit-breaker limits attributed to the bloodletting taking place overseas, I am not surprised to see both bulls and bears trying to cash in on EEM.

The most-active put for EEM today is the December 20 contract (MBY XT), which has seen volume of 34,453. I looked into the activity, and 31,000 of these contracts crossed the tape in 2 transactions. Just short of noon EST, a block of 11,000 contracts crossed the tape at the ask price of $3.30, suggesting that the contracts were purchased. This transaction was marked spread, meaning that it could be part of a straddle, strangle, or some more-complicated strategy. Whatever part this block played in the spread, it was a healthy $3,630,000 laid out for the transaction.

The remaining 20,000 contracts crossed the tape at 11:02 EST, right at the bid price of $3.00. This price suggests that these contracts were sold ... was it the close out of current positions? Perhaps, but the transaction carried a price tag of $6,000,000. If these were closeouts, I certainly hope that our hypothetical seller got his/her money's worth.

The call side was a little less definitive, as all 4 of the major transactions crossed between the bid and the ask prices. Nevertheless, 15,250 of the 30,499 January 22 calls (MBY AV) that crossed the tape took place in 4 blocks totaling 5,000; 5,000; 1,250; and 4,000.

With EEM taking a massive plunge during the past 4 weeks (40.4% to be exact), the put activity does not surprise me. With the call activity occurring closer to the ask price, it certainly seems that intermediate-term option players are looking for a bounce from EEM.

What I find interesting is that we have long been told to purchase emerging markets. We now have to watch out for an unwinding of this sentiment - which could serve to push EEM lower. The Schaeffer's put/call open interest ratio (SOIR) for EEM ranks in the 15th percentile, suggesting that there is plenty of room for optimism to unwind and push the ETF lower.

On to Japan, Europe, Australasia, and the Far East

The call activity isn't limited to EEM. In fact, 2 other foreign-minded ETFs have seen heavy call activity: the iShares MSCI Europe, Australasia, and Far East Index Fund and the iShares MSCI Japan Index.

EFA (EFA | Quote | Chart | News | PowerRating) saw all of its call activity cross in 1 transaction. At 10:39 AM EST a block of 15,000 contracts crossed the tape with a transaction of 55 cents. The problem is that the transaction was market late, rendering me powerless to tell if this was potentially the purchase of new contracts or if it was the liquidation of existing contracts. If this were the liquidation of contracts, I again hope they got their money's worth, but it may have been too little too late. EFA gapped below 52 on October 6, and it has been downhill since, pushing the stock to its current price of $40 per share.

Puts were also active on EFA, namely the 42 strike (EFE WP). Several large blocks of contracts crossed at this strike, with the largest (4,739 contracts) occurring at 9:46 AM EST. This transaction took place between the bid and ask prices, as did several of the others. This price gives us little to go on, but I'm guessing we are seeing the liquidation of these positions to take a bit of a profit.

EWJ (EWJ | Quote | Chart | News | PowerRating) saw all 4,000 of its notable December 11 calls (EWJ LK) cross at 11:19 AM EST. These contracts were broken into 2 transactions, both of which crossed between the bid and ask prices. If these contracts were purchased, it could be someone with a very bullish outlook - as EWJ is trading in the 8 region. On the other hand, perhaps this hypothetical option player believes EWJ will rally through resistance from its 10- and 20-unit daily and weekly moving averages until it meets overhead resistance from its 10-month trendline, which resides in the upper-11 region.

The Verdict?

So, what does all this mean? With the U.K. teetering on the brink of recession, the Nikkei plunging, and currencies struggling in China, Japan, South Korea, and other Asian nations - it certainly seems that some option players may have been getting their money back in hand today. Is this a smart move? Only time will tell, but I know it is often far more comforting to have your money in hand rather than have it losing overseas.

Newly revised and updated, Bernie Schaeffer's home study program, "10 Days to Successful Options Trading," provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report – Click here to learn more.

Copyright Schaeffer's Investment Research. www.schaeffersresearch.com.