Crash Protection Demand Spikes Most Since the Brexit

The combined 20-day put/call volume ratio on the SPX, SPY, IWM, and QQQ just saw the sharpest spike since the Brexit

Jan 20, 2017 at 1:58 PM
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Following a rally to record highs right after the presidential election, stocks cooled off in recent weeks, as traders exercised caution ahead of Donald Trump's inauguration today. What's more, it appears demand for "stock market insurance" has been on the rise, as evidenced by a spike in the purchase of index put options.

On Dec. 21, the combined 20-day put/call volume ratio on the S&P 500 Index (SPX - 2,266.30), SPDR S&P 500 ETF (SPY - 226.30), PowerShares QQQ Trust (QQQ - 123.07), and iShares Russell 2000 Index Fund (IWM - 133.95) sat at 1.73 -- the lowest reading since May 2015. Since then, the ratio has skyrocketed to 2.35 -- a 36% increase in 17 days. That's the sharpest spike since just before the Brexit, according to Schaeffer's Senior Quantitative Analyst Chris Prybal.

20day BTO Indexes Jan 20

Just yesterday, the SPY saw roughly 342,000 puts added to open interest, compared to 246,000 calls. And on Wednesday, the daily put/call volume ratio hit an annual high of 3.41. Even more outstanding, the IWM -- a proxy for the Russell 2000 Index (RUT) -- saw roughly 141,000 puts added overnight, compared to just 67,000 calls. And the QQQ -- the Nasdaq 100 Index's (NDX) exchange-traded fund (ETF) -- saw 69,000 puts added, more than twice the number of calls.

Put open interest on the SPY is in the 94th percentile of its annual range, with about 16.6 million puts outstanding. On the flip side, just under 7.6 million SPY calls are open, in the meager 44th percentile of its annual range. The soon-to-expire January 224- and 225-strike puts have seen the biggest open interest additions in the past two weeks, followed by the February 222 put. The January 224 and 225 puts are now home to peak open interest in the series -- which expires tonight -- overtaking the January 220 strike. In the soon-to-be front-month series, the February 225 put -- equivalent to the SPX's key half-century 2,250 level -- is tops, with nearly 220,000 contracts outstanding.

It's nearly the same story with the IWM, which has close to 5.7 million puts open right now -- higher than 94% of all other readings from the past year -- compared to 16.8 million calls (in the 58th percentile). The soon-to-be front-month February series has dominated recently, with the 124-, 132-, 133-, and 140-strike puts the four most added in the past 10 sessions. However, the deep out-of-the-money March 115 put remains home to peak open interest of more than 129,000 contracts.

The QQQ boasts 2.6 million puts -- in the 76th percentile -- more than twice the number of QQQ calls open (47th percentile). The February 120 put has seen the biggest influx in the past two weeks, with more than 35,000 contracts added. However, after expiration tonight -- at which point peak open interest at the January 115 put and January 120 call will expire -- the February 125 call and the deep out-of-the-money 116 put will be home to peak front-month open interest.

But while many traders purchased "portfolio insurance" via puts on the aforementioned indexes, others have been looking to capitalize on a potential rise in volatility expectations. As noted earlier this week, call options on the CBOE Volatility Index (VIX - 12.43) -- often dubbed the market's "fear gauge" -- have been flying off the shelves, too, as traders placed bets ahead of the inauguration and upcoming Fed meeting.

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