U.S. equities are soaring out of the gate this morning amid widespread optimism.
Bulls can thank the instant gains to new polls out of Britain suggesting sentiment is shifting towards keeping the country in the European Union ahead of this Thursday’s referendum.
Last week Brexit fears roiled global markets, ushering many U.S. indexes to — and some through — key support levels. With buyers on the ropes the land over, today’s pop couldn’t have come at a better time.
And while volatility will likely remain elevated for the entire week as participants jockey for position ahead of Thursday’s historic vote, this morning’s jump is a rousing start in the effort to reclaim all that was lost last week.
Not surprisingly, the euphoria is having a disproportionate impact on European markets and related ETFs. As such, two European-centric funds take center stage in today’s missive.
Behold, three ETFs that are going bonkers today.
3 ETFs That Are Going Bonkers: iShares MSCI EAFE Index Fund (ETF) (EFA)
Traders looking for a direct way to play the ongoing volatility in Europe should take aim at the iShares MSCI EAFE Index Fund (ETF) (EFA). It’s the definitive king of Europe-based ETFs, boasting over 20 million shares of daily trading volume. It also boasts decent liquidity in its option contracts, which is a characteristic lacking in most other foreign funds.
On the heels of the rally in European equities, EFA opened over 3% higher this morning. While the fund does offer some exposure to Asia and Australia, the bulk of its holdings (64%) emanate from Europe, making it a prime choice for wagering on the upcoming Brexit vote.
The trend for EFA is, and will likely remain, choppy until Thurday’s vote. Option premiums remain expensive, however, so if you have a mind for playing binary events, try selling the July $54 put if you’re bullish.
3 ETFs That Are Going Bonkers : iShares MSCI Germany ETF (EWG)
The iShares MSCI Germany ETF (EWG) is following in the footsteps of EFA today. Or perhaps, EFA is following in the footsteps of EWG. Given the dominance of Germany (and German companies) in Europe, it should come as no surprise that EWG and broader European ETFs boast a strong correlation.
EWG is also up 3% this morning, reclaiming almost all of the ground lost during last week’s Brexit-driven swoon. And despite a volatile few months, shares of EWG are now just a bit down year-to-date.
With the price trend dithering and a binary event looming, good luck divining direction for the week ahead. My preferred approach with such a setup is to sell the juiced-up option premiums, which will undoubtedly fall following Thursday’s vote.
If you’re bullish, sell the July $24 puts. If bearish, sell the $6.50 calls.
3 ETFs That Are Going Bonkers: Powershares QQQ Trust (ETF) (QQQ)
Europe’s stock surge is spilling into American equities. The tech-heavy Nasdaq Index is enjoying a 1.7% rally this morning, reversing Friday’s sharp sell-off. Despite the notable jump the action in the Powershares QQQ Trust (ETF) (QQQ) remains messy. Its moving averages are flat on virtually all time frames, suggesting a lack of conviction from bulls and bears alike in recent months.
And despite this week’s Brexit vote, implied volatility in QQQ options remains subdued. You can still sell options, of course, but you’re just not getting paid much for your troubles.
If you think today’s run continues throughout the week ahead, consider a bullish option play if QQQ can break above near-term resistance at $108.60.
Due to the cheap option, I like buying the Aug $109/$112 call spread.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.