The largest trade (so far) in the options market today is (what appears to be) a fairly massive bearish put spread bought in the iShares Russell 2000 etf, the IWM:
When the etf was $119.10, a trader bought 111,500 of the May 107 / 90 put spreads, paying $2.09 to open (buying 111,500 of the May 107 puts for 2.86, and selling 111,500 May 90 puts at .77). The premium outlay for this trade is $23.3 million dollars!
This trade breaks-even at $104.91, down about 12% from current levels, but if the etf is above $107 on may expiration (down 10%), the trader loses the $23.3 million.
As we have detailed on numerous occasions over the course of 2015, the Russell 2000 (small cap stocks) is interesting because of its relative under-performance to large cap and tech stocks. The RTY is down 50 bps on year vs the SPX up 1.5% and the Nasdaq Comp up 8.5%. More importantly the IWM is down 7.5% from its all time highs, vs the SPX and the Nasdaq Composite just 2% from their highs. The year to date chart below shows the etf approaching an important breakdown level from mid August at $120, after bouncing in mid November from support at $115:
Taking a longer term view of IWM’s performance from the lows of the financial crisis in 2009, one can see that despite the Russell being the first major US equity index to make a lower low from late August, the IWM has held its uptrend from its 2009 lows, which by the way has outperformed the SPX (up 250% vs 220% for the SPX):
Back to the trade detailed above, the choice of strikes is interesting as the Oct 2nd low, the day the IWM last tested the uptrend was about $107, with little technical support below $100, possibly to about, you guessed it, $90!
The implied vol paid in the 107 puts is about 24% which is high historically:
But the 24% vol paid is much more a result of skew to the downside puts than implied vol being pumped generally. You can see what the skew looks like in IWM here (May in purple):
So clearly people are willing to bid up the downside for protection. This trader laid off some of that skew/premium risk by selling those 90 puts at an even higher implied vol of 29%.
Regular readers know that we place little emphasis on unusual options activity, and rarely if ever chase it. But it’s interesting to see how large investors are using options to protect their portfolios, the timing of hedges, the expirations and strikes chosen.