Big Printin’ – KRE Puts Bought or Sold?

by riskreversal January 3, 2017 11:58 am • Big Printin'

Right out of the gate this AM there was a large block of puts that traded in KRE, the S&P Regional Bank Index. When the etf was $56.50 at 9:45 am, it was reported that 10,000 of the Jun 46 puts were bought for $1.  But taking a quick look at the trade recap, and intra-day implied volatility (the price of options) in KRE these puts might have been sold, as they traded mid-market. That suggests the market maker on the other side of the initiator hedged with stock and then printed the options. That action can make them look bought rather than sold.

But who knows? These options are only a 15 delta, meaning the options market places a little less than a 15% probability that they will be in the money on June expiration. Not a great option to sell if bullish as its a general rule of thumb to not sell low delta options, especially to open, but also not a particularly a high probability bet if making an opening directional bearish bet.

Let’s break it down so you can see the confusion:

First here is the report from the floor it traded on, the Philadelphia Options Exchange:

KRE jun 46 puts cust bot 10k for 1.00 X’d

Here is the report from Bloomberg that shows the trade was opening, there was only 96 open interest prior to the trade, shows traded mid market, and that implied volatility fell nearly 19% on the day, maybe suggesting selling pressure:

The trade recap from Bloomberg shows the prints after the 10,000 trade as ticking lower below the print price, also suggesting small sellers after the print, which would likely occur after a large sale as opposed to a buy:

Given the fact that option prices declined and the block traded mid market it very well me be that the initiator in this case sold the options to open, meaning the dealer bought them, and to hedge would need to be long stock.

Lastly, the choice of strikes could be informative. If you were long the KRE prior to the epic breakout in November, then you might look for dollar cheap protection below that level. A look at the 1 year chart below shows the $45 breakout level (46 strike less $1 premium gets you to $45):


On the flip-side, if you were long KRE and looking to add some yield, despite the low delta of the June 46 puts, you might be inclined to lean on that $45 level as it should serve as decent technical support.

This example is one of the reasons we tend to be a bit cautious about drawing too many conclusions from unusual options activity, and why we offer the following disclaimer when discussing unusual options activity; without intimate knowledge of the trade, or the trader’s intent and what it may be against, it’s nearly impossible to glean too much useful information. In this case, if you were to take the report from the floor at face value, that someone is buying way out of the money puts to open, it may be misleading.