Puts Pick Up as SPDR S&P 500 ETF Trust (SPY) Tests Key Level

With stocks under pressure, SPY is testing a crucial put strike

Oct 13, 2016 at 2:18 PM
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With stocks getting crushed today amid rate-hike concerns, the SPDR S&P 500 ETF Trust (SPY) is testing the critical $212 level. Not surprisingly, put options have really picked up on the exchange-traded fund (ETF), just as they have on the S&P 500 Index (SPX). As Bloomberg pointed out yesterday, the put/call skew on the SPX recently hit its highest level in history.

Returning to the SPY, roughly 1.7 million put options have changed hands so far, 1.4 times the expected intraday total -- and dwarfing the 791,000 calls on the tape. Most active by a mile is the January 2017 170-strike put, and Trade-Alert confirms several huge sweeps have been bought to open at the deep out-of-the-money option. In fact, over 150,000 contracts have traded at the strike, easily besting the previous high-volume day of just 8,100 contracts, set on Aug. 30.

Most likely, the goal for these options players is not for the SPY to actually breach $170. Rather, the traders are likely hedging their portfolios ahead of the U.S. presidential election, in the event that stocks implode in the aftermath of the Nov. 8 vote.

As alluded to, put demand has been hot of late. In the last 10 days alone at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly 1.9 million put options compared to roughly 1.1 million calls. What's more, SPY's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) -- which measures near-the-money open interest in the front three-months' series -- clocks in at a top-heavy 2.12, with puts doubling calls.

If the SPDR S&P 500 ETF Trust's (SPY) intraday price movement is any indication, a downside hedge just might be a smart bet. The ETF was last seen 0.3% lower at $213.10. Right now, of course, the key is for the $212 area to hold. This strike is home to peak put open interest in the October and November series, with upwards of 480,000 contracts in tow.

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