CHICAGO/NEW YORK Investors took a bullish stance in the iShares MSCI Japan Index on Tuesday, positioning for a rebound in Japanese equities after a torrid sell-off.
The exchange-traded fund tracks the performance of the Japanese equity market and ended down two cents to $10.03. At its lows, the fund has dropped nearly 14 percent since last Friday's devastating earthquake and tsunami.
Option activity during the first half of Tuesday's session "suggests some investors believe the sell-off could have been overdone and are either closing out recent long put positions or opening new bullish strategies," said Patrick Mortimer, director of options trading at New Hope, Pennsylvania-based Pipeline Trading Systems.
Option turnover in the fund has soared in recent sessions, and the underlying shares posted record volume on Tuesday, as the disaster worsened.
"We're seeing U.S. investors taking a bullish stance toward Japanese equities today and mostly expressing that bullish view through the EWJ," said Ciaran O'Kelly, head of equities, Americas, at Nomura.
In the options market a massive bullish trade set the tone earlier on Tuesday, said Interactive Brokers Group options analyst Caitlin Duffy.
Duffy said one investor paid four cents per contract to purchase 102,500 calls at the April $11 strike and sold the same amount of puts at the April $8 strike in a strategy called a risk reversal.
The transaction would start to make money if shares rally 10 percent over the closing price of $10.03 to surpass the break-even price of $11.04 by April expiration, Duffy said.
Nomura's New York derivatives desk also reported the large risk-reversal trade in the EWJ as an institutional investor accumulated the equivalent of 10 million shares of upside exposure by initiating the trade.
The trade accounted for a substantial portion of Tuesday's volume. In all, about 343,000 puts and 562,000 calls changed hands in the ETF, or 27.5 times the average daily turnover, according to option analytics firm Trade Alert.
Mortimer also said that early on Tuesday, one large trade was the sale of 20,000 March $10 puts at 37 cents apiece.
"This strike saw its open interest nearly double to 51,000 contracts yesterday and had a closing price of 20 cents," he said. "If this is indeed a closing trade, the investor reaped an 85 percent profit overnight."
The fund, which has a market cap of $5.58 billion, was one of the most actively traded ETFS on Tuesday.
"Over the past three trading days through Monday, there had been no change in the outstanding shares in the EWJ, suggesting that investor appetite for Japanese assets has not diminished," said Nicholas Colas, chief market strategist at ConvergEx Group in New York.
"Year-to-date the fund is still one of the big winners in 2011 in terms of new money flows. It is still the third most successful fund in terms of collecting new investor assets," Colas said.
(Reporting by Doris Frankel; Editing by Dan Grebler)