Volatility Explodes as the SPDR S&P 500 ETF Trust (SPY) Skims Lows

The SPDR S&P 500 ETF Trust (SPY) is fresh off an annual low, and capturing attention from put traders

Jan 20, 2016 at 2:55 PM
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Bad news for SPDR S&P 500 ETF Trust (SPY) bulls -- the broad-market exchange-traded fund (ETF) is down 1.7% at $184.78. Worse yet, the SPY has taken out a crucial technical level en route to a new annual low of $181.02. Not surprisingly, this has the ETF's options pits running in overdrive.

By the numbers, over 4.5 million SPY contracts have been exchanged so far -- two times the expected intraday rate. In the lead is the March 175 put, with nearly 132,000 contracts on the tape. According to data from the International Securities Exchange (ISE), a significant number have been bought to open as speculators wager on (or hedge against) a sharper pullback.

Amid the broad-market bloodbath, volatility is spiking, as evidenced by sharp gains on the CBOE Volatility Index (VIX) and iPath S&P 500 Short-Term Futures ETN (VXX). VIX was last seen over 10% higher at 28.67, on track for its highest finish since Sept. 1. In options land, one trader may be initiating a long call spread at the "fear gauge's" February 35 and 40 calls (per Trade-Alert), betting on higher volatility in the month ahead.

Meanwhile, the VXX has tacked on 5.7% at $28.23, also putting it on pace for its highest settlement in over four months. Digging deeper, calls outweigh puts, with significant action transpiring at the weekly 1/22 series. In particular, buy-to-open activity is detected at the weekly 1/22 29-strike call, suggesting traders foresee VXX toppling $29 by this Friday's close, when the series expires.

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