As I write the S&P 500 is down about 40 basis points on the year. A year that saw a bubble inflate and pop in Chinese stocks, the long waited reflation of the U.S. dollar, the continued implosion of commodities, a serious correction in the high yield debt market and U.S. Treasury yields at about the exact spot they were when we started the year. For those that simply check their large cap equity and bond funds, it appears that not a whole heck of a lot is going on in the investment world. You and I know that’s not exactly the case. And tomorrow’s rate decision and investors reaction will determine whether or not the SPX has its first down year since 2008, which would be only the second since 2002!
There has been no shortage of positioning with options in sector and index etfs in the lead up to tomorrow, which could prove to be the last catalyst for volatility between now and year end. This catalyst poses risks to some as they’ll need to protect any year to date performance, while it also poses an opportunity for others who thrive off volatility and use scheduled events like FOMC meetings to make targeted directional bets.
There were two large directional options trades in the SPY (S&P 500 etf) and the QQQ (Nasdaq 100 etf) that caught my eye in today’s trading.
First, when the SPY was $205.25, there was a bullish roll in short dated calls. A trader sold to close 90,000 Dec 18th expiration 210 calls at 24 cents, and the bought to open 45,000 of the Dec 24th weekly 206.50 calls for 1.54 to open. This trade now breaks event at $208.04, up 1.4% from trading levels, dramatically improving the odds of success, gaining more time and a lower break-even.
And Second, when the QQQ was $112.82, a trader rolled up a bearish view, selling to close 74,000 Dec 18th expiration 109 puts at .32 and buying to open 74,000 Dec 18th expiration 111 puts for 75 cents. These puts now break-even at $110.25, down about 2.3% from trading levels.
While these trades are decent size and short dated, I have to offer our normal disclaimer as it relates to unusual options activity, unless you know the trader’s intent for purchasing options on index etfs, it’s nearly impossible to glean any reasonable information for your own trading. These could be hedges against a basket of longs or shorts, or against an underlying stock position in the etf, or strictly a volatility play. You get the point. What I take-away from this action is that there are no shortage of opinions in front of an event that is likely to spark a move one way in either direction into year end.
As for the chart of the SPX, its been my view since the spring that the path of least resistance is no longer higher, and that the 2100 level which the SPX broke-down from in late August is a fairly important technical resistance level. With the SPX at 2050, I suspect we see 1900 before we see 2200: