The $1.35M SPY Options Hedge

The SPDR S&P 500 ETF Trust (SPY) is in the red today, as stocks sell off amid earnings and geopolitical concerns. What's more, it looks like one options trader is betting on -- or hedging against -- even steeper losses for the exchange-traded fund (ETF) over the next couple of months.

Around midday, symmetrical blocks of 150,000 contracts changed hands at the June 216 and 217 puts. Data from Trade-Alert indicates the 217-strike puts were bought to open for $1.40 apiece, and the speculator helped fund the position by selling to open the 216-strike puts for $1.31 each. The bear put spread was established for a net debit of $0.09 per spread, or a cool $1.35 million (premium * 100 shares per contract * number of spreads).

If the trader is a "vanilla" bear, she's hoping the SPY lands between $216 and $216.91 (bought strike minus net debit) before June options expire. However, considering the puts are so far out of the money, and the "sweet spot" is so narrow, it's likely the speculator is hedging her stock portfolio against more broad-market headwinds. Either way, the most the investor can lose on the trade is $1.35 million, should SPY remain atop $217 through the options' lifetime.

While SPY has pulled back since its March 1 all-time high of $240.32, the ETF is still up more than 11% year-over-year. What's more, the SPY's 232 strike -- equal to the 2,320 level on the S&P 500 Index (SPX) -- is home to significant put open interest in the April series, which could lend support through week's end, as Schaeffer's Senior V.P. of Research Todd Salamone noted in this week's Monday Morning Outlook. In addition, he said, the "SPX 2,324 level" -- also the rough equivalent of SPY's 232 -- "represents a round $20 billion market capitalization for the index," and is home to the SPX's 80-day moving average, which provided short-term support in September.