Unusual Options Activity: 3 ETFs to Buy Now

As I write this with the trading week a few minutes in the rearview mirror, the S&P 500 gained nearly 2.3% over the past five days. Over the same period, there are a bunch of ETFs up more. Some of them are even exhibiting unusual options activity. 

I can’t remember when I picked ETF call options to highlight rather than stocks. It’s high time that I remedy this oversight. 

Many of the top-performing ETFs over the past week -- up 4% or more -- are energy-related funds. Some of these may be exhibiting unusual options activity.

Regardless, here are call options to buy from some of this week’s top-performing ETFs. 

Brazil Looks Interesting

The iShares MSCI Brazil ETF (EWZ) does what its name suggests: invests in large and mid-sized Brazilian companies. It tracks the performance of the MSCI Brazil 25/50 Index, a collection of stocks that covers approximately 85% of the market cap of Brazilian publicly-traded companies.  

The 25/50 means is capped so that no stock in the index can have a weighting of more than 25%. In addition, the sum of stocks with a 5% weighting should not exceed 50%. The index rebalances quarterly to ensure it gets back in line with the 25/50 cap.

EWZ currently holds 46 stocks. It is up more than 10% over the past five days.

The top three holdings by weight are Vale (VALE) at 14.85%, Petroleo Brasileiro preferred shares at 8.88%, and Petrobras (PBR) at 7.62%. The top three sectors by weight are financials (25.20%), materials (20.39%), and energy (18.91%). In many ways, it’s very similar to a broad-based Canadian ETF. 

The economy in Brazil is waiting to see what happens in the country’s November election. 

The incumbent, President Jair Bolsonaro, has spent the past three years selling off assets of BNDES, the state development bank. If he gets in, the divestment of government assets should continue. His opponent, former President Luiz Inacio Lula da Silva, would likely slow the privatization push. Currently, Lula is ahead of Bolsonaro, but the race is tightening. 

Whatever happens, Brazil and South America continue to grow and develop their economies. The following 10 years should be far better for the region than the past 10.

As for possible EWZ call options to play, I see the Sept. 29/2023 $32 call contract to be an excellent choice. Its ask price is $5.05, so you’ve got 343 days for the ETF’s share price to rise 8.2% to break even. 

The volume on Friday is just 30 call contracts but that is 6.0x the open interest. Barchart considers volume-to-open interest ratios greater than 5 to be high. 

The World Goes Nuclear

The second ETF I'm looking at is the Global X Uranium ETF (URA). It’s up nearly 8% over the past five days. 

The biggest reason I can think of for URA being up so much was the Oct. 11 announcement by Brookfield Renewable Partners (BEP, BEPC) that it was partnering with Cameco (CCJ) to buy Westinghouse Electric Company, one of the world's largest nuclear services businesses. Brookfield will own 51%, and Cameco will own 49%.

Cameco is one of the world’s largest uranium producers, the fuel necessary to power nuclear reactors. In August, Japan’s Prime Minister, Fumio Kishida, announced that it was restarting some of its idled nuclear reactors. It also is interested in developing next-generation reactors. 

The uranium business is looking good for the next few decades. 

According to the URA web page:

“The Global X Uranium ETF (URA) provides investors access to a broad range of companies involved in uranium mining and the production of nuclear components, including those in extraction, refining, exploration, or manufacturing of equipment for the uranium and nuclear industries.”

URA’s top holding is Cameco, with a 22.10% weighting. Its weighting is more than double Sprott Physical Uranium Trust (SRUUF) at 9.83%. As Cameco goes, so goes URA.

As for call options exhibiting unusual options activity, my only option is the Dec. 16, 2022 $17 contract with 56 days to expiry. The contract comes with a $4.10 ask price or $410 per contract. That’s 24% of the investment you’d make to buy 100 shares of URA. That’s pretty high.

However, to break even, URA’s share price only has to increase by 3.3% over the next two months. It did it in five days. I don’t see why it can’t do it over 10x as long.

Innovation Be Damned

On this last ETF, I’m going out on a limb by selecting the ARK Innovation ETF (ARKK), which is up more than 5% for the week. A rare win for embattled portfolio manager Cathie Wood. 

I sometimes wonder if she faces more criticism because she’s a woman or because she’s a Christian. We’ll probably never know in such a male-dominated industry.

Wood’s investment style is at odds with a significant segment of the investment community. However, her faith has probably come in handy these past few months. Just as people liked to say why Elon Musk would fail with Tesla (TSLA) until he started to win, Wood could very well follow the same path, which would be ironic, given her support of Tesla over the years.

The call option contract I’m interested in is the Dec. 2/2022 $37.50 with 42 days to expiry. We’re not talking a whole bunch of volume -- 17 contracts as I write this -- but what volume it does have is 17x the open interest. 

The break-even is $39.88, 6.3% higher than where it currently trades. It has to gain 0.7% per week until expiry. Given ARKK’s volatility, it’s possible but not probable. 

Govern yourself accordingly. 

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