Traders circle bullish call options in dollar ETF

* Options sentiment in dollar ETF UUP turns bullish

* Dollar ETF call volume is 13 times avg daily turnover

By Doris Frankel

CHICAGO, Nov 4 (Reuters) - Option traders on Wednesday appeared to be betting that the dollar will recover as they aggressively scooped up call options in an exchange-traded fund tied to the U.S. dollar index.

The dollar fell in choppy trading against most major currencies after the Federal Reserve left interest rates unchanged, as expected, and said it intends to keep interest rates low for some time. For full story, see [ID:nN04579728]

Shares of the PowerShares DB US Dollar Bullish Fund (UUP.P), which tracks the performance of the dollar index against a basket of currencies, slipped 17 cents to $22.51.

The ICE Futures U.S. dollar index .DXY, which measures the dollar's value against a basket of six other major currencies, fell 0.83 percent on the day to 75.751, retreating from Tuesday's one-month high of 76.817.

The fund's shares move up when the dollar strengthens relative to other major currencies. But since October, the dollar has underperformed against most major currencies and UUP is down 17 percent from its November 2008 high of $27.14.

In the options market, however, sentiment was "decidedly bullish," said WhatsTrading.com option strategist Frederic Ruffy as investors aggressively bought UUP call options before and after the Fed's Federal Open Market Committee statement.

"The fact that investors continued to buy call options in the fund after the FOMC statement suggests they expect the dollar to rebound regardless of what the Fed had to say today," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. "Of course, a hint of raising interest rates from the Fed would have suited their call positions."

The call activity could also suggest investors expect higher volatility surrounding the value of the dollar in the short term and thus, boost call premiums, Wilkinson said.

The Fed said in its statement that while economic activity has picked up, consumer spending remained constrained by job losses and tight credit.

Overall volume in the UUP swelled to 12 times the average daily turnover with about 403,000 calls traded versus 2,822 puts, according to option analytics firm Trade Alert.

Investors early on Wednesday started to pile into the November UUP $23 calls. The action came in large blocks hitting at the offer and shortly before the Fed announcement, more than 250,000 contracts traded in the strike price.

The call action persisted after the Fed signaled no real changes to its low rate policy and the fund's shares edged modestly lower in afternoon action, Ruffy said.

Ruffy said one player bought 50,000 November $23 calls at a premium of 15 cents apiece. Meanwhile, others sought a little more time and bought the December $23 call strike rather than the front-month calls.

According to Reuters data, the November $23 call strike attracted volume of 330,279 contracts, more than eight times the existing positions held by investors at the close.