SPY Options Trader Wagers $1.5 Million on a Short-Term Rally

SPY call options are trading at nearly double the expected intraday rate

Mar 22, 2017 at 2:27 PM
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SPDR S&P 500 ETF (SPY) options are flying off the shelves this afternoon. Calls, in particular, are running at nearly double the expected intraday rate, and on track to finish in the 95th annual percentile. This comes just a day after SPY put options hit their second highest level since Election Day.

Driving options trading on the shares has been a series of enormous blocks and multi-leg transactions. The biggest of them all consisted of matching 150,000-contract lots that crossed at the weekly 3/24 236- and 237-strike calls. According to Trade-Alert, an options trader initiated a bull call spread, buying to open the lower strike and selling to open the higher -- anticipating SPY will rally up to $237 by week's end, when the series expires. The speculator's initial cash outlay -- and maximum potential risk -- was $1.5 million ($0.10 premium paid * number of contracts * 100 shares per contract).

Apparently, the aforementioned options trader isn't being spooked off by SPY's week-to-date struggles. Despite seeing a "call wall" fall at the 240 strike with standard March expiration last Friday, the exchange-traded fund (ETF) has dropped 1.2% of its value this week to trade at $234.18.

Taking a step back, it appears put buyers have been in the driver's seat lately, potentially buying SPY options to hedge their stock portfolios. SPY's 50-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is a top-heavy 1.88 -- and in the bearishly skewed 84th percentile of its 12-month range.

Not to mention, the ETF's Schaeffer's put/call open interest ratio (SOIR) is 2.04. In other words, among options in the front three months' series, puts more than double calls. Digging deeper, peak open interest within this time frame resides at the 230-strike put, with roughly 600,000 contracts in residence. In the last 10 sessions alone, 86,000 April 230 puts have been added -- the fifth largest increase among all strikes.

From a technical perspective, though, a return to this out-of-the-money strike by front-month expiration seems unlikely. Specifically, delta on the April 230 put is negative 0.30 -- or less than 1-in-3. Then again, the chances of a rally back to $236 by Friday night is statistically improbable, suggesting the aforementioned options trader could lose $1.5 million. Right now, delta on SPDR S&P 500 ETF's (SPY) weekly 3/24 236-strike call option is just 0.16, or 16%.

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