SPY Put Options Price In Another Shocker

Options traders appear to be bracing for a market-rattling event similar in magnitude to last year's major votes in the US and UK

May 23, 2017 at 8:32 AM
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Options volume exploded last Wednesday as stocks sold off in response to the ever-spiraling series of crises from Capitol Hill, with the Options Clearing Corporation (OCC) recording the highest single-day volume since Nov. 10 -- and the most active day for put options, in particular, since June 24. Not surprisingly, the broad-based SPDR S&P 500 ETF Trust (SPY) attracted quite a bit of attention; Trade-Alert data shows SPY generating more than 80% of the day's ETF option volume. That includes some 3.59 million SPY puts, which marked the fund's highest put volume day since the post-election peak of 3.91 million back on Nov. 9.

Simultaneous with this spike in SPY put volume was a jump in the exchange-traded fund's 30-day at-the-money implied volatility (IV) skew, which reflects the difference in IV levels between put options and their call counterparts. In percentage-point terms, SPY's IV skew popped to 6.00 on Wednesday, and kept climbing to 6.10 by Thursday -- this metric's highest point since the Nov. 8 pre-election peak of 7.63.

Notably, in the midst of this SPY put volume frenzy, 30-day IV on the fund rose only as high as 12.29% as of Wednesday, in territory explored as recently as mid-April. Likewise, the CBOE Volatility Index (VIX) briefly set a marginal new year-to-date high on Thursday, but eventually cooled to end the session lower (and settled the week not too far above its calendar-year midpoint). So while short-term puts on SPY are now considerably more expensive than their corresponding call strikes, it would seem that short-term volatility expectations are still well within what's recently been the norm.

From a purely practical standpoint, this bottom-lines to a less-than-ideal time for investors to hedge long stock positions via the purchase of short-term, at-the-money SPY put options, which have rarely carried a steeper IV premium in the last year relative to their call counterparts -- and as such, it's an effective reminder that the best opportunity to acquire portfolio hedges is before you need them.

And from a sentiment analysis standpoint, it's interesting that SPY put volume last week attained heights previously reached on just two other occasions in the past year -- both of which coincided with election results (first in the U.K., and then here in the U.S.) that were generally considered to be the unlikeliest possible outcome. And to add another layer to this analysis, the number of bulls in the latest American Association of Individual Investors (AAII) survey tumbled, as of the week ended May 17, to the lowest level since the U.S. election, as the so-called "despondency ratio" of neutral and bearish respondents hit its loftiest point since Nov. 2.

With the appointment of a special counsel creating a considerable overhang of uncertainty in Washington, D.C., and cable news pundits floating "the 'i-word'" in their nightly broadcasts, it may be of some comfort to investors to consider the degree to which a "Brexit"-level -- or "Trump victory"-level -- shocker appears to have been already priced into the SPY options market.

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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, May 21.

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