SPY Options Demand Driven by Hedging Activity

SPY put options have long held an advantage over calls

Apr 6, 2017 at 3:21 PM
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SPDR S&P 500 ETF (SPY) options traders are showing a distinct preference for puts over calls today. Roughly 1.1 million put options have changed hands, outpacing the the 900,000 calls exchanged so far. From the looks of it, the lion's share of the put activity can be traced to one SPY options trader.

According to Trade-Alert, one speculator likely initiated a put ratio spread around midday, buying 30,000 May 235 puts and selling 52,500 May 222 puts. At the same time, this same investor purchased 750,000 SPY shares, while the exchange-traded fund (ETF) was hovering near $235.56. In other words, the trader anticipates short-term upside in SPY, but erected the put spread as a downside hedge -- fearing a potential drop to $222, a 5.7% discount to the current price of $235.53.

Today's preference for SPY put options is business as usual. The ETF's total put open interest of 14.4 million contracts leaves the 7 million calls in the dust, but sits in the ho-hum 51st annual percentile. Echoing this, SPY's Schaeffer's put/call open interest ratio (SOIR) is 1.97, meaning puts roughly double calls among options expiring in the next three months. However, the SOIR ranks in the middling 58th annual percentile, suggesting the preference for puts over calls is in line with the average from last 12 months.

Within those short-term series, huge accumulations of put open interest can be located at the near-the-money 235 strike, as well as the out-of-the-money 230, 225, and 220 strikes. But, as with today's SPY options trader, most of these positions were likely at the hands of investors hedging their stock portfolios, rather than by outright bears.

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