I have a feeling that we will look back on today and say this was a fairly important reversal day, maybe not only in risk assets, but possibly in investor sentiment towards the effectiveness of Central Bank monetary policy at this stage of the game. Soon after the ECB’s announcement, and prior to the U.S. open, it was risk on, the German DAX was up nearly 3%, the Euro Stoxx Bank Index (SX7E) up 7%, the Euro was down nearly 1.5%, Gold was down 1% and the S&P futures were up 1%.
Well it was that little comment in the presser that the ECB may not need to lower rates again caused a massive reversal, with the DAX closing on its dead lows of the session down 2.3%, the SX7E closing up only 88 bps, the Euro up 1.6% as I write, up nearly 3% from its lows, a MASSIVE intra-day move for a currency, Gold up 1.4% and the S&P 500 down 15 bps.
Some of the large directional etf options flow today may suggest that investors are looking to hedge existing positions after a such a sharp one month bounce, or rolling outright bearish bets as today’s action suggests that the BOJ and the FOMC may only disappoint.
Here was some flow that caught my eye today:
XRT: see our update to our positioning shorty before noon (here), but it looks like anther trader saw what we did in the retail etf, potential exhaustion. When the etf was $44.50 a trader sold to close 15,000 April 40 puts at .28 and bought to open 15,000 June 42 for 1.32. The trader rolled up and out, these puts now break-even at $40.68, down about 10%. On a near term basis, the etf seems to have found some technical resistance around $45, just below its 200 day moving average:
XLF: when the Financials etf was $21.76 in the afternoon a trader bought to open 50,000 of the July 20/18 put spread for about 39 cents. This trade breaks-even on July expiration at 19.61, down about 10%. The break-even on the downside happens to be very near the 3 year closing low made on February 11th:
XBI: The biotech etf saw a bearish trade in June expiration, possibly a collar of an existing long. When the etf was $49.25, a trader sold to open 10,000 June 57 calls at $1.60 and bought to open 10,000 of the June 47/40 put spread for $2.30. The entire package (the credit for the call, less the debit for the put spread) cost 70 cents, or $700,000 in premium. If this is in fact a put spread collar against 1 million of stock, then the investor would have gains of the stock up to $57 (less the 70 cents in premium paid). The investor would have losses of the stock between current levels and $46.30, protection between $46.30 and $40, but no protection below $40. This seems like a fairly complicated and expensive way to get out of the money protection, while also capping upside up 15% for an etf that is still down 45% from its 52 week highs.
To my untrained eye, this chart is a disaster. While the XBI’s 12.5% is greater than the SPX’s 10% gains off of it’s 2016 lows made last month, it is anemic when you consider the under-performance on the downside. $40 seems like reasonable technical support down 55% from the all time highs:
SLV: the etf that tracks silver, you know the ugly red-headed stepchild of gold. Today SLV call options caught a shine, when the etf was $14.80 a trader paid 37 cents for 46,000 of the June 16.50 calls to open making this strike the single largest line of open interest. I have no idea why silver would ultimately awake from its long dirt-nap, but when you look at the five year chart a little out of the money call premium with the right reasons for a bounce might not be the worst trade for those who wake every morning in a doom bunker.