Big Printin’ – SPY Games

by Dan April 6, 2017 3:56 pm • Big Printin'

There’s been no shortage of warnings this week from some stone cold Wall Street playas (Jamie Dimon of JP Morgan and Larry Fink of Blackrock) that the stock market may be overly enthusiastic since the election vs the actual growth we’re seeing in the U.S.. These two might be a tad more sanguine if the new President’s proposed pro-growth agenda had gained a bit more traction in his first 80 days in office, so we’ll know more in the coming months on that. But for equity markets near term, the most important thing won’t be Q1 results and GDP which is obviously backward looking, but guidance for Q2 and possibly the balance of the year. If managements hint that spending is on hold until they get more clarity on policy, then rosy eps growth projections of the SPX might prove optimistic, and would be less supportive of existing valuations.

For now we wait. But there was an interesting trade in SPY options today that caught my eye. When the etf was $235 at 3pm, a trader sold to close 53,000 April 235 calls at $1.81, and bought to open 94,000 May 241 calls for 86 cents. This new call position breaks-even at $241.86, up 2.5% from the trading level, interestingly, just above the all-time high made on March 1st at $240.32.

The prior high is obviously the only real technical resistance near term, while the etf appears to have decent near-term technical support between $230 and $230:


Short-dated options prices in the SPY have picked up a bit in the last couple weeks, after making new 52 week lows in what was a large hat-size, 30 day at the money implied volatility is now just above 10% (blue below). 30 day at the money realized volatility (how much the underlying is moving, white below) has also picked up since 2016 lows the day the SPX made new all-time highs on March 1st, but still sits nearly 2 vol points below implieds. In other words, owning SPY options in the current environment will be expensive if we do not see a pickup in movement: