UUP The Junction

• Posted by Adam Warner
• on November 6th, 2009

The lesson on this UUP trade should NOT be to just follow a big order into a name. Yes of course it worked here, but it’s a VERY dangerous way to play. Consider again all those VIX OTM calls this summer that did not work. Impossible for us non-wired mortals to know the genesis of a big trade.

With the benefit of hindsight, it’s apparent someone knew this UUP was on the verge of disjointing from the dollar it’s purported to track. If it’s public knowledge, then good for him, he saw opportunity, and I don’t believe there’s much illegal about buying calls on hopes it causes a chain reaction like this. If he acted on non-public info, well, I’m sure that crackerjack SEC will get right on it.

It’s a fascinating trade (if you find options at all interesting). Our f***ed up dollar policy intersecting with our f***ed up ETF approval process. Makes us all proud, lol.

So I guess there is a takeaway here. Just assume every ETF you see that’s not a plain-vanilla basket of stocks will disjoint in someway at some point. I’m looking at your VXX, UNG, USO. Leveraged ETF’s are actually the best of the bunch in that at least the answer was pure math.

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