SPY Put Volume Ramps Up as Stocks Sell Off

SPY options traders have preferred puts over calls

Aug 18, 2017 at 9:38 AM
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Stocks took a turn for the worse yesterday, as anxiety surrounding the Trump administration and a terrorist attack in Barcelona stoked fear in the U.S. stock market. The S&P 500 Index (SPX) plunged 1.5%, while the SPDR S&P 500 ETF Trust (SPY) shed 1.6% -- their biggest losses since May 17. SPY options trading was brisk, too, with 4.71 million contracts traded, nearly two times the average daily volume and settling in the 98th annual percentile.

Most of the action occurred on the put side, with 3.17 million contracts traded, compared to 1.54 million calls. This put bias is nothing new for the exchange-traded fund, though, with 17.76 million puts currently open -- just 1 percentage point from an annual high -- compared to 7.38 million calls.

The soon-to-expire August series garnered the bulk of the attention, accounting for each of SPY's 10 most active options. According to data from the major options exchanges, new positions were purchased at the August 242, 244, and 246 puts, suggesting speculators are betting on even more downside for stocks today, with the front-month contracts set to expire at tonight's close. SPY was last seen trading at $242.62, down 0.2% today. 

Longer term, one options trader may have initiated a long straddle in the soon-to-be front-month series, betting on a big SPY swing in the next four weeks, regardless of direction. Specifically, it looks like 12,500 September 265 calls were bought for 2 cents apiece, while a symmetrical block of September 265 puts were purchased for $20.41 each, resulting in an initial cash outlay of $25.5 million (12,500 contracts * $20.43 net debit * 100 shares per contract).

This is the most the straddle player would stand to lose, should SPY settle near the strike at the close on Friday, Sept. 15, when the options expire. Profit, meanwhile, will begin to accumulate should SPY to topple the upper breakeven rail of $285.43 (strike plus net debit) -- nearly 15% above the ETF's Aug. 8 record high of $248.91 -- or continue to retreat beneath the lower breakeven point of $244.57 (strike less net debit).

The latter scenario would call for SPY to breach its 80-day moving average. This trendline contained yesterday's retreat, and the exchange-traded fund has not closed below here since Nov. 8, the day of the U.S. presidential election.

spy daily chart august 18


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