Thursday, November 5, 2009

The UUP trade. Speculation meets supply & demand (UUP)

Who would have thunk it? UUP, it's shares so in demand the ETF was . Quick strategic thinking should tell you this is bullish and now the shares will trade above NAV, or @ a premium higher than the true value. *As noted the inverse of UUP UDN . Look at it this way, whoever owns UUP shares now knows they control the offer, "you buy from ME!".

Today when the shares began trading after the halt, price discovery began. The ETF's offers lifted on block buying eventually breaking violently higher on from what I believe was a reaction to possible hedging of sorts. The hedging in reaction to the massive call buying going down on the 23 strike right after the shares began trading. Big blocks were being snapped up like hand fulls of potato chips, why not they were "". Market makers countered by buying up shares of the stock causing shorts covering. Snow ball affect.

There are two key factors which make this trading "anomaly" something worth placing bets on.

1. The USD's recent strength and large have come at key technical levels. This legitimizes the idea and act of speculating on the direction of the UUP in my opinion.

2. Proshares recently (Tuesday) issued its basically stating in a nut shell they are out of ammo(shares), and they gotta load the magazine to meet the gunners needs. Wednesday the UUP 23 calls had big buys on the 23 strike ahead of the fed announcement. The trade really presented itself on Thursday as traders exchanged 23 calls in huge blocks after the halt causing the shares to squeeze higher on pure good ol' supply and demand. The new OI data today will tell us how many of those calls were sold and or bot which alerts us if the position has grown larger.

Combining these factors makes the timing of this trade seem almost to perfect. But the dates align. Someone a firm, whoever read the 8-k on Tuesday, used their critical thinking and said, "WHOA this thing is gonna fly if they". They bot calls nearest to the money in the front month the next day betting the thing was gonna trade higher than NAV followed by a short squeeze. All this while the strength of the actual dollar is at the backs of everyone long the UUP.

Whatever the case maybe the next few weeks are going to prove very interesting for trading in the UUP, USD and of course equities. Kinda like a perfect storm starting to rumble. I look at this whole "anomaly" as bullish the dollar. Why, because even before these calls were bot there was an apparent prior demand for shares in the UUP which is obviously bullish.

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