Breaking Down the Surge in SPY Options Trading

SPY continues to struggle against the key $240 level

May 18, 2017 at 2:04 PM
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Stocks sold off Wednesday as chaos in D.C. rattled markets. The major U.S. benchmarks suffered their steepest single-day losses of the year. The SPDR S&P 500 ETF Trust (SPY) -- which equates to roughly one-tenth the value of the S&P 500 Index (SPX) -- plunged 1.8%, after hitting a record high on Wednesday. This volatile price action sparked a rush of SPY options activity, with nearly 5.4 million contracts traded, the most since the U.S. presidential election. For the sake of comparison, SPY options volume hit a 12-month peak of 6 million contracts traded on June 24, the session before the Brexit vote.

May SPY Options Liquidated Ahead of Expiration

The May 230 and 235 puts were the two most active SPY options on Wednesday, where a collective 260,087 contracts traded. Overnight open interest translations suggest options traders were liquidating their positions ahead of this Friday's front-month expiration, though both strikes remain home to peak put open interest levels in the standard May series.

Elsewhere, new positions were initiated at SPY's July 220 and 222 puts, though it looks like the bulk of the activity at these two deep out-of-the-money strikes was of the short variety. One trader, in particular appears to have bought to close a 30,000 block of May 220 puts and rolled them out to the July series. By writing the puts to open, options traders expect SPY to stay north of the strikes through July options expiration.

SPY Put Options Are More Popular Than Calls Today

Today, SPY options volume is trading at a faster-than-usual clip, though it pales to Wednesday's brisk pace. Around 1.4 million puts and 823,000 calls are on the tape, about 1.4 times what's typically seen at this point in the session. The May 235 and 236 puts are extremely active, where there appears to be a mix of buying and selling occurring. While it's unclear whether positions are being opened or closed here, buy-to-open activity may be happening at SPY's May 236.50 and June 237 calls.

SPY Stares Down "Call Wall" as Options Expiration Approaches

Schaeffer's Senior V.P. of Research Todd Salamone has repeatedly pointed to SPY $238-$239 as "key levels to watch" as they correlate with the exchange-traded fund's closes on recent Fed decision days. Additionally, the 240 strike is home to peak open interest of 292,782 contracts in the soon-to-expire May SPY options series. As Salamone pointed out in this week's Monday Morning Outlook, this "call wall" puts the SPY at a higher risk of "headwinds into Friday's expiration, as long positions associated with the calls at the 240 through 242 strikes are steadily unwound." After two closes north of $240 this week, SPY was last seen trading at $236.19.

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