Traders pull back in dollar fund after new shares issued
*UUP ETF issues new shares on Friday
*SEC grants 100 mln more shares for bullish dollar ETF
*Some traders exit long call positions as dollar falls
By Doris Frankel
CHICAGO, Nov 13 (Reuters) - Some traders abandoned the U.S. dollar on Friday and sold call options on an exchange-traded fund (ETF) tied to the dollar index as the greenback fell broadly.
Shares in the PowerShares DB US Dollar Index Bullish Fund (UUP.P) fell 2.1 percent to $22.32, mirroring a broad decline in the U.S. currency on spot foreign exchange markets.
The exit followed a surge in bullish bets last week in the ETF that led to a sudden shortage of supply, ultimately prompting exchange authorities to halt trading in the fund on Nov. 5.
The buildup in bullish call positions may have first been driven, in part, as a play on the Federal Reserve and whether it would signal plans to start withdrawing stimulus spending, thus spurring a rise in current low interest rates.
Instead, the central bank last week did little to dissuade markets from believing rates would remain at record lows near zero well into 2010.
Some UUP call option buys were also to hedge short dollar positions elsewhere in investor portfolios, traders said.
"Bullish option players are scurrying to the exits today faced with the double worry of a sharp reversal in the dollar on top of the additional shares in circulation," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
The shortage of shares created a divergence between the fund's value and that of the underlying index. This disappeared when the fund's manager DB Commodity Services LLC, a subsidiary of Deutsche Bank, said it received U.S. regulatory clearance on Thursday to offer more shares to investors.
The issuance of new shares began Friday.
"When that supply became available today, the premium disappeared," said Steve Claussen, chief investment strategist at online brokerage OptionsHouse LLC.
"It seemed that some option investors exited their long call positions earlier in the session, giving up on the idea that the dollar would rally in the near term."
The dollar index .DXY, a measure of the greenback against six major currencies, fell 0.4 percent on Friday after losing about 1 percent last week. The UUP fell more than that Friday as it made up for the deviation from the index the previous week.
DB Commodity Services LLC, a subsidiary of Deutsche Bank, responded to the shortage of supply by submitting a filing on Nov. 2 with the U.S. Securities and Exchange Commission to register 100 million additional shares to meet demand.
"Many call option buyers originally assumed that the UUP would diverge in price away from the dollar index due to the lack of tradable shares," Wilkinson said. "The fact that there is an availability of increased supply dismisses the rationale for that trade."
On Friday, sellers of the November and December $23 call strikes surfaced in the morning as the fund failed to build on Thursday's gains, said WhatsTrading.com option strategist Frederic Ruffy. That sentiment seemed to shift later in the session as buying interest was renewed.
In the end, about 156,000 calls and 6,000 puts traded, a ratio of more than 25-to-1, according to Trade Alert.
The November, December and January $23 call strikes attracted the heaviest volume. On the International Securities Exchange, the No. 1 U.S. equity options market, where about 38 percent of the UUP options changed hands, sentiment data indicate that 52,000 or 88 percent of the activity in UUP calls represented fresh buying positions, Ruffy said.
The fund, created in February 2007, is managed by DB Commodity Services and distributed by Invesco PowerShares Capital Management LLC.
(Additional reporting by Steven C. Johnson)
(Reporting by Doris Frankel; Editing by Andrew Hay)
