Your guess is as good as mine why the S&P 500 is up 1.8% today, reversing much of the last two day’s losses. Wednesday and Thursday equity weakness was being assigned to Fed Chair Yellen’s commentary suggesting the Fed would raise rates in two weeks at the next FOMC meeting (for the first time since June 2006). But today’s strength following the November jobs data that essentially was the nail in the coffin for said rate increase seems to be having the opposite effect on equities.
Investors appear to be chasing, and the higher we go, the more comfortable they seem to be with the notion that when the Fed actually does increase rates by 25 bps on Dec 16th, equity markets will be ok. There is also a bit of chasing going on in the options market too, with two fairly large trades in contract size (but not exactly premium terms)trading. The fact that they are directional and the timing caught my eye.
The first trade was in the XLF, the Financial Select etf. When it was trading around $25.50 there was a buyer of 50,000 Dec 18th 25.50 calls paying .08 to open. These calls kept printing with three more blocks of 35,000 each, with a total of 180,000 trading on the day, all opening. The average price was about 8 cents, or about $1.45 million in premium. They break-even in two weeks time on Dec 18th at $25.58, up about 4.5%, interestingly at the prior highs:
Another similar sort of catch up trade in a sector etf came in the XLK, the Technology Select etf, of which Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT) and Facebook (FB) make up 40% of the weight. When the XLK was $44.25, a trader paid .09 for 55,000 of the Dec 45.50 calls (equaling about $500,000 in premium), with a total of 70,000 trading on the day. These calls break-even in two weeks time on Dec 18th at $45.59, up about 3%, above the prior all time highs:
As stated above, its not the premium commitment that is particularly interesting about these two trades, it’s that hedge funds (or at least one) are targeting the week of the FOMC to be a positive catalysts for U.S. stocks. The purchase of low delta options with a low probability of success does not exactly speak to high conviction, but could be their way to cheaply leverage an existing long.