I’m starting to sound like a bit of a broken record, but if someone is looking at the S&P 500 (SPX) up 2% on year and about the same amount away from its May 2015 high, and looking at spot VIX just below 16, and walking away with the impression that all is well in the financial world, I think they are probably mistaken. It’s been my view that the rapid descent in global sovereign yields, with trillions sporting a negative yield, and the U.S. 10 year Treasury today hitting its lowest yield on record at 1.367% is telling you all you need to know about investor sentiment. And that message is that things are poor at best despite the largest equity index in the world hovering below all time highs. Regular readers know that it has been my steadfast view that this bid for the SPX, recent bid for the U.S. Dollar and unrelenting bid for U.S. Treasuries has been little other than a flight to relative quality for investors the world over. The key word there is relative.
We like to keep our eye on unusual options activity as it often re-confirms themes that we see in markets, and the commitment of capital (without knowing what its for, or against for that matter) can offer some insight into prevailing sentiment. GLD is a great example. GLD is the etf that tracks gold. Since gold started its 30% run from its 6 year lows in December, we have seen no shortage of upside call buying and rolling of spreads in the GLD, largely a result of investor demand for safe haven assets.
Today the largest options trade of the day was a bullish one in GLD. When the etf was trading $128.50 there was an opening buyer of 66,000 of the Sept 30th quarterly 135 / 140 call spreads paying 96 cents to open (vs selling shares on a 7 delta, or $6.33 million in premium. First things first, because the delta was only 7, this trade looks and feels like a long shot. But it breaks-even up just 6%. The way the GLD has been moving in 2016 it feels like it could be there in no time, certainly by the end of September if we continue to have this risk-off feel in almost every major risk asset, aside from the SPX! Also the spread was traded vs selling 420,000 shares of stock, this could be stock replacement, but not likely given the low delta. I suspect this is someone looking to take profits in the etf but who wanted to to further define their risk in call spreads would look for something closer to the money. Lastly this is exactly the sort of behavior we have seen all year, when the etf gets to apparent resistance, some traders/investors have looked to profit from the next move to obvious resistance, and that’s about 1400 in Gold, or about 140 in GLD: