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Huge ETF trade bets against euro

By: optionMONSTER
Posted: 10/12/2010 1:50:00 PM
Referenced Stocks: EUO;FXE

The euro has staged a massive rally in the last six weeks, and now traders are getting short using options and an exchange-traded fund.

optionMONSTER's tracking systems detected huge call buying the ProShares UltraShort Euro ( EUO ) exchange-traded fund, which moves about twice as much as the Euro/U.S. dollar exchange rate, but in the opposite direction. The November 19 contract accounted for the bulk of the activity, trading more than 32,000 times against open interest of just 1,971. Most of the volume priced for $0.90 to $1.

EUO The EUO is up 0.47 percent to $19.19 in afternoon trading. The fund has lost 17 percent of its value since the beginning of September while the Currency Shares Euro Trust ( FXE ), which tracks the currency directly, has climbed 9 percent over the same period (purple line on chart).

The euro had been gaining ground as investors resumed a long-term trend of rotating reserves into the common currency and away from the greenback, and as strong overseas growth drew investors back to international stocks and commodities. Emerging-market currencies have done better than the euro, prompting countries such as Brazil and Thailand to restrict capital inflows.

Today's call buying represents a bet that the euro will suffer at least a minor pullback. The trade may represent a hedge on a broad portfolio that is inversely correlated to the dollar. It also comes hours before the Federal Reserve releases minutes from its last meeting, scheduled for 2 p.m. ET today.

Overall options volume in the fund is 29 times greater than average, with calls accounting for 95 percent of the activity.

(Chart courtesy of tradeMONSTER)