Huge bet on European market rally pays off for option trader

CHICAGO (Reuters) - Aggressive, bullish option bets placed on Friday that European markets would recover imminently appear to be paying off handsomely.

A day after a wave of selling knocked U.S. stocks down as much as 9 percent and pushed the euro to an almost 14 month-low on Thursday, bullish option plays were initiated late on Friday tied to the shares of the iShares MSCI Spain Index Fund EWP.P.

Options on the EWP, an exchange-traded fund that tracks the performance of the Spanish equity market, measured by the MSCI Spain Index, “had its busiest day ever on Friday,” said Henry Schwartz, president of options analytic firm Trade Alert.

The ETF shares closed at $33.41 on that day.

“The bet came ahead of the weekend when a European solution was expected to be announced, and although many were skeptical, this trader made a massive bet that the European markets would rally,” said Joe Kunkle, a founder of Web information site

The plays, which involved nearly 20,000 call options in the May EWP $38 strikes, was prescient.

The Spanish IBEX .IBEX on Monday soared 14.4 percent, after falling 13.8 percent for all of last week.

Early on Monday, governments of the 16 euro nations agreed to lend as much as 750 billion euros to the most-indebted countries. The European Central Bank said it will counter “severe tensions” in “certain” markets by purchasing government and private debt. For details see [nLDE649296].

Investors -- big and small -- like ETFs because they are securities that track an index and can be easily bought, sold or shorted. Option investors often use them as an inexpensive way to protect portfolios or bet on sector movement.

ETFs are also a good investment tool for diversifying a stock portfolio and to generate income.

About 20,000 EWP calls changed hands on Friday, compared with 459 puts, 50 times the combined average daily volume, Trade Alert data show. Nearly all of the call volume was in the May $38 call strike. Data show the ETF calls were buyer-initiated, opening positions by a big customer and were struck 15 percent out-of-the-money.

With less than 30 minutes of trade left on Friday, an unusually large order came through the iShares MSCI Spain Index, as a block of 17,000 May $38 calls were bought at 45 cents, while the EWP was trading at $33.17, Kunkle said.

This shortly was followed by a buyer of 2,750 of those calls, also for 45 cents, Kunkle added.

The number of existing positions held by investors prior to those trades in the May $38 call strikes was 1,298 contracts, indicating new positions were put on, Trade Alert data show.

With each call priced at 45 cents, the total premium outlay was nearly $900,000. The buyer on Monday appears to cashing out on at least a portion of these call options.

“It was a good trade,” Schwartz said. “It appears the trader decided to lock in some gains by selling part of the position, collecting an average price of $1.14 per contract.”

The May $38 calls fetched 95 cents per contract on Monday, up 111.11 percent from Friday, according to Reuters data. They earlier hit a high of $1.40 each.

The profit of the trade so far is $1.3 million based on where the May $38 call options premiums traded early on Monday, said Jud Pyle, chief investment strategist at Options News Network, a division of option market making firm PEAK6 Investments.

“The option buyer may not have been informed that something was going to happen,” Pyle said. “But purchasing the options for 45 cents each, acted like a lottery ticket for possible positive events in Europe.”

The ETF shares rose 14.5 percent to $38.27 on Monday.

Reporting by Doris Frankel; Editing by Dan Grebler