iShares MSCI So. Korea Fund (EWY) is seeing bearish order flow for a second time in three days. Friday, investors showed interest in the July 21/16 ratio spread. Today, the April 15-18-21 put fly traded 3000X. Shares are up $2.00 to $24 and the strategist paid .375 per fly, according to an exchange floor contact.
Like the ratio spread, the butterfly has a bearish bias. The ratio spread was targeting $16 per share. The fly has a maximum pay-off of $2.625 at the $18 strike. The range of profitability (excluding commissions) is between $15.375 and $20.625. So, like ratio spread trader, this investor is positioned for a subsantial decline in South Korea’s equity markets. Why?
The bearish trading is perhaps related to recent hostility between North and South Korea. North Korea is very displeased with recent war games being carried out jointly between South Korea and the US. In fact, North Korea closed their borders and stranded hundreds of South Korean workers Monday (read more). While they re-opened the borders Tuesday and the economic impact from these events migth be minimal thus far, the bearish trading might be on the view that South Korean equity markets might see relative weakness due to the escalating tensions should Asian markets take another turn for the worse.
The butterfly offers a cheap way to play it with a wide profit range.
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Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.