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SPY and the 12 10,000 call option trades:
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$60 Call
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$65 Call
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$70 Call
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$75 Call
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$80 Call
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$85 Call
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$90 Call
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$91 Call
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$91 Call
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$92 Call
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$93 Call
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$94 Call
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$95 Call
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Read this: #msg-22471573
Look at this: http://finance.yahoo.com/q/op?s=SPY
This $900 Million Bet Has Global Traders Talking…
By Keith Fitz-Gerald
Contributing Editor
Insiders trade when they know something. They’re not supposed to, but they do anyway. It’s just a fact of life.
Most of the time, it’s pretty petty-ante stuff, but occasionally a trade comes along that makes even jaded professionals like me sit up and take notice.
Just such a trade surfaced last Wednesday when anonymous parties agreed to buy and sell 120,000 SPY September call options using deep-in the-money strikes ranging from 60 to 95.
If you’re not options savvy, don’t worry. SPY (AMEX: SPY) – also referred to as a “Spider” in trader parlance – is an exchange-traded fund (ETF) that mimics the performance of the stock market’s closely watched Standard & Poor’s 500 Index (INX). These strike prices equate to a SPY trading between 600 and 950, or roughly 35.81% to 59.46% below where it was Monday.
Any way you cut it, this is a monster trade because it controls 12,000,000 SPY shares. In fact, at a blended price of $7,500 per option, this works out to a $900 million bet that will play out by Sept. 21, when these options expire.
Why haven’t you heard about this on your favorite cable TV money show, or read about it in the business section of your favorite newspaper? Simple: There are just so many possible explanations for this trade that your head would spin. The chances are good that the current lot of reporters just aren’t able to make heads nor tails out of this deal; and with nobody talking, there are simply no warm bodies to interview.
But that hasn’t stopped the professionals in the trading community from trying to figure it all out. In fact, since the trade first came to light about a week ago, the professional trading community I’m a part of has been abuzz with conjecture. That alone makes this a highly unusual trade because – like any small, professional community – we can usually figure out who’s doing what to whom and why – without even having to rely on more than one or two educated guesses. We just know.
But this time around, nobody’s talking.
Naturally, this silence has put the conspiracy theorists on edge and set the blogosphere aflame. Most of the theories are outrageous, but there are a couple that – quite frankly – aren’t so farfetched and even make some sense. But I have to stress, once again, that nobody who’s actually a party to either end of this transaction has been identified or is talking, which makes this all the more noteworthy – and maybe even a little spooky.
So absent the “who,” let’s take a moment and see if we can’t focus on, and figure out, the “why.”
Pushing aside anything that has to do with UFOs, the “third gunman” on the grassy knoll, the Philadelphia Experiment, or the Soviet K-129 submarine’s failed nuclear strike on Pearl Harbor, my experience as a longtime global-capital-markets trader tells me that there are actually some very real and very rational possibilities amidst the wild hypotheses circulating on the Internet. But, they’re just that – possibilities. And even with my admittedly conservative analysis, the scenarios I provide here could be wrong … either completely, or in part. Conversely, there may be an element of truth to one or more of these.
So let’s take a look at several of the possible scenarios that I’ve crafted for you.
A ‘Dividend Capture’ Strategy: Such a trade could conceivably be part of a monster dividend capture strategy used by several hedge funds and even one of my favorite ETFs, Alpine Dividend Dynamic (Nasdaq: ADVDX). Under this scenario, it’s possible that whoever bought these options will exercise them immediately prior to securities going ex-dividend on Sept. 21, before dumping or selectively rotating out of stocks that don’t immediately take off upon dividends being issued. Such a trader would profit from a rise in the SPY.
A Major ‘Covered Call’ Play: If this is the scenario, we’re talking about one of the largest covered-call plays in recent memory, if not market history. In contrast to retail investors who commonly use out-of-the-money strategies, many professional traders like me prefer to use deep-in-the-money covered calls that reduce risk and enhance returns at the same time. It’s a volatility play that you won’t read about in any options trading textbook. But it’s also one that doesn’t require a trader to go this deep in the money to pull off, which would make this scenario a bit too strange. [Incidentally, I’ll be talking about this particular trade, as well as some of my other favorite options-trading strategies at the World Money Show in Florida next year].
A China ‘Dollar Dump’ Play: China hasn’t been stung by the subprime-mortgage mess – or, if it has, it hasn’t reported it, yet. But what if its financial system has been torpedoed by this growing global credit crunch? Well, although China has publicly promised not to, one possible consequence is that the country’s government may be planning to dump dollars in the next few weeks. This would obviously create havoc in the U.S. financial markets, but it would also subsequently give whoever shorted these options the chance to buy them back for pennies on the dollar after a knee-jerk “correction” that creates panic selling sometime over the next three weeks. Assuming China can even collect a mere $5 per option, the victor in this scenario would bank a cool $60 million for their efforts. A $10 profit per option would net $120 million, excluding carry and execution costs … (but with that many zeros, why sweat that “small stuff.”
The Dark Possibility: The fourth and final possibility I see out there is considerably more ominous. In essence, this trade potentially suggests that a very large player has effectively sold his or her SPY holdings for cash, without pressuring the market downward. If this is true, whoever placed this trade is essentially betting that the SPY – and, by extension, the broader market – will lose anywhere from 35% to 55% of its value in the next three weeks. Now – and I stress this – the “why” here is moot to even discuss; we have no idea what their thinking or motivations might be. What is important to understand here is that if this scenario is correct, whoever sold out did so to maximize the value of their SPY holdings, while at the same time avoiding the potential loss in value that such a large block transaction would inevitably cause under normal market operations.
Stick To The Facts
My advice is that this trade is an important piece of information for investors. Sure you can read the conspiracy theories or plug into the professional traders network, but at the end of the day, all you’ll be left with is still more conjecture.
That’s why I’ll stop short of advancing my own theories as to who made this trade and why.
Instead, I urge you to focus on the facts that we know, which is that somebody traded some very large blocks of options at some very unusual price points a mere three weeks prior to expiration. This means that at least one-half of the traders involved expect something big to happen, and pronto, while the other half hopes that nothing will happen – and feels confident enough to believe that they’re correct.
Interestingly, since I’ve been investigating this admittedly fascinating topic and talking about it at length with my network of professional trading colleagues, there’s been continued trading in the September 60, 65 and 70 strikes, which have added another 6,000 lots of open interest between them in the last few days.
Now for the $64,000 question…
How To Play This Information
There are clearly two courses of action available to individual investors, and each is uniquely dependent on what the investor thinks that this trade suggests.
Investors who believe this trade suggests an upside opportunity. If you see this big options transaction as a harbinger of higher stock prices, you could effectively cover your SPY trades with one deep-in-the-money SPY call option for every 100 SPY shares you own, and capture the volatility skew this trade exploits on the call side when your SPY shares are called out at expiration. Depending on your basis, you could conceivably use strikes as low as the mystery traders did to achieve that objective.
Investors who view this as a “preview of coming attractions,” that consists mostly of a sharp sell-off in stocks. If you’re more of a “half-empty” type of thinker, and expect stock prices to fall, you could buy a “grundle” of SPY puts at those same strikes – 90 and lower – for between 0.03 cents and 0.05 cents per lot (at least, that’s where they were trading as I write this). Then, if the market does tank for whatever reason in the next three weeks, you will benefit not only from the fall in price, but also from the resultant explosion in volatility that goes with such an event. The beauty of this trade possibility is that – depending on how far and how fast the market falls – you may not even have to see your puts come into the money to profit if you’re nimble enough. The obvious limitation in this scenario is that the time-value component of each option decays at a very high rate, and is working against you, meaning that the odds are very high that you’ll lose all of the money you use to purchase your put options if nothing ends up happening.
The Bottom Line
The bottom line here is that we may never know who placed the trades. But what we do know is that the trades were placed, and that other investors are apparently piling on for reasons that will only become known in hindsight – if at all.
And this, my friends, makes the trades noteworthy – if for no other reason than they are, like so many things in the global capital markets these days, a complete enigma at the very moment the decisions you must make are at their toughest.
Related Articles:
Money Morning Report:
China Insists it Won’t Dump Dollars.
http://www.moneymorning.com/2007/08/29/this-900-million-bet-has-global-traders-talking%e2%80%a6/
And charts 1.375377145 Pure QQQ P/C Ratio Open Int
This is what happened yesterday
4167161 Calls
5731418 Puts
25032 more calls
230808 more puts
Combined with the breakout of accumulation/distribution and on bal volume, this high Pure QQQ P/C ratio suggests QQQ share purchases backed with puts for protection. It looks like this has been happening this whole rally OR we are about to see a huge new high and an equal blow off top…who knows this is still very young data for any trust but I will continue to save this data and post the charts
See previous post, from yesterday…accumulation/distribution and on bal volume http://www.investorshub.com/boards/read_msg.asp?message_id=1369897
A New Channel starting?
I don't have a stockcharts account so maybe you can draw in the new channel lines from the lows and highs the last month and a half?
http://bigcharts.marketwatch.com/javachart/javachart.asp?symb=qqq&time=7
Morning Dave,
I am watching 9000 as critical support here. Not sure if you saw my somewhat joking post comparing MIR to the INDU #msg-1215198 but just as MIR sold off quickly after losing support at it's major moving average then so also the INDU might selloff if it loses support at it's 50SMA. It is also possible though that we see the slow steady incline that kept the markets moving from April until June, maybe. The market traded from 8200-8600 during that period and could trade here between 8900-9300, maybe. Continuing to hold support above the 50SMA might be the deciding factor. Losing support at the 50SMA and it becoming resistance might have the market mvoing to 8600-8700 to retest support though. That is again where the MIR comparision would show a retest of that lower support bouncing to find resistance at the 50SMA and then continuing down. A possible scenario if the 50SMA fails and there is not enough optimism about any sustained economic growth forecasted for the 4th quarter. The timeframe for such a decline to retest lower support might not be too far off with September generally being a selloff month. There is always the possibility of a ramp up into September much as last year though to limit the damage, maybe. Another potential negativity is that most major Al Queda attacks occur every two years. That would leave this year as being a higher probability of some type of attack. I don't want to be too much Doom and Gloom but the possibilities for a substantial selloff in September again are there. August will most likely be a testing month with the Markets continuing to consolidate near the 50SMA and trying to decide if it is support or resistance, maybe. Any more Negative News could have us retesting 8800 before then though and setting up September for a possible decline to 8500 or lower. Again, the markets continuing to hold Support at the SMAs will be the deciding factor and If that support is lost could setup a fairly negative scenario.
We will just have to watch and see what happens.
Good Luck Dave! :^)
Myst had a chart similar to that
It was for a shorter term Short setup where the trendline was broken and then became resistance for the Short trigger. I will be watching to see if the trendline can be resumed or if it will indeed become resistance.
Thanks Dave,
I will be watching to see if this turns into something longer term or not. I think that along with 925 SPX as a breakdown level that watching the QQQ losing support at 28 and finding resistance there could be a turning point. I would think that is a pretty good 'line in the sand' you have there, it might equal 27.50 QQQ.
Morning Dave,
The last dip certainly accelerated the Puts Eh? I would also anticipate that it could possibly lead to a big surge coming up here. I think that if the Memorial weekend is quiet then we might get a pretty big day on Monday, maybe. Still working on the 8550-8625 range today but a breakout on Monday is not out of the question and could lead to a retest of the recent highs, maybe. I think that right now it all depends on how the weekend turns out and if the terrorist threat level is lowered next week. Continuing to find resistance at the longer term 10SMA could be the precursor to further down though as happened the end of last May. Still a long way from a negative SMA crossing but the possibility is there in the future if we continue to find resistance and eventually lose support. 4 weeks to expiration and I am tempted to look at mostly straddle type trades as a lot could happen in that timeframe with the markets, JMHO though :^)
Hi Bob 2,
Now take a look at this. We could have a blow off top in the morning if the futures would go to the 938 area. Also the Vix is within a half a point of the BB bottom line which would say a reversal. Giving the number of puts there is probably a low chance of this happening before a holiday
Hey Bob,
This market has gotten insane with all the puts being bought this week. The put call for Monday thru Wednesday was 1 each day and then today it went even higher which is in a bottom area of the chart. You have to assume that we go higher here, and maybe have a huge day coming up. Head and shoulder in the SPX over the last couple weeks possibly now.
QQQ failed to breakout over 29
Will it now fail to hold support above 28? Or will we get a breakout of the SMA resistance and another retest of the highs?
A SPY look at SMA support and resistance
You can see how the longer term SMAs are affecting the support and resistance of the SPY here. Just a slight hurdle to clear the resistance and resume the uptrend. Still a possibility that the resistance will hold at a higher level but the previous two days held support and I would Anticipate that might continue. The resistance holding could lead to another retest of support though :^)
Yowsa!
Looks as though most of the tops have had a 'double top' in the past? I wonder if that will continue here or if we have already seen it in the Markets and it has not had time to be reflected in the Sentiment charts? Would need a failure of the Support and it becoming resistance to confirm a reversal. Could actually retrace to 8500 or slightly lower and still resume the uptrend. Will be watching both short term and long term support for a possible failure.
Good Luck Dave! :^)
Good Morning Dave,
That is indeed an interesting article. I have often wondered why the Fed would want Bonds to look like a good investment if that is taking money out of the economy which could be stimulating it? I think that was part of their plan to keep the money out of the markets but it only resulted in more Speculative money coming into the markets rather than longer term investors IMO. The Markets turning unstable added even more attraction to the Bonds and continued the cycle of money being pulled out of the markets and also out of the economy. If the Fed is now trying to stimulate the economy by stimulating the markets then that could indeed turn into another Bubble of Trouble. It is interesting that with the decline in the Dollar that you do not here anyone attributing the decline to Inflation Eh? I will indeed be keeping an eye on the VIX for a piercing of the Bollinger band as I have seen that phenomenon working with a Lot of stock and Index charts both in short term and long term timeframes. Whenever it occurs in the longer term charts it is usually a good longer term signal.
Thanks for the links Dave! Enjoy the Day! :^)
Another sign of a Breakdown?
Market needs to get back Above the SMAs or they might just become resistance. Watching to see if they will cross negative or not.
Yikes is Right!
Looks as though we are higher than the levels the beginning of December. Watching the TNX here to see if it's 100SMA is indicating that the Trend is indeed turning Negative. Will just have to watch and see what happens :^)
Morning Dave,
I will check out the link. Looks as though I picked the wrong day to sleep in Eh? Nice reversal here with the resistance at 8510 yesterday turning into support this morning Eh? Looks like we will still be testing this area a while, maybe. Once again will be watching to see if this lower high will once again lead to another selloff or not. SMAs might just continue to offer some Support, maybe.
Enjoy the Day Dave! :^)
Evening Dave,
The NYLOW closed at 1? Wow, that is incredible. We have topping tails on all of the Index daily charts today so I will be watching for some further Bearish candles here to confirm. The FTSE was closed today and I was really looking forward to seeing how it handled 4000 again. NDX and the Nasdaq were very near the Dec resistance levels and, so far, could not break them. I am still in the Bear camp but a breakout above the Dec resistance that holds support might just get me thinking a bit Bullish, maybe. Thanks for pointing out the NYLOW chart and I will definitely keep it in mind if Thinking about going Long here. Time to grab the Bull by the horns?
Good Luck Dave! :^)
Morning Foot,
Today could be the day that decides whether we hold support or not. The markets were able to do that in October but failed in December. We will just have to watch and see what happens :^)
Thanks Foot,
Watching 860 here in premarket and it Might hold, 860 was support last Tuesday. 864 was early morning resistance though and safer to wait for a move above that that holds support. Really a lot of upper resistance until we clear 875 again. Playing a move from 850-55 back to 875 could be possible. Above 880 and holding support I think that we could regain the uptrend. A fairly small trading range looks as though it might continue, 10-15 points.
Good Luck Foot! :^)
Morning Foot,
Great charts, I like this one. We are hitting resistance but there was a lot of volume on this last breakout of the range. We might only get a retest of support and continue higher, maybe. I am still not sure how the markets are going to react if or when we go to war. Long term this week might indeed be a good time to enter a short. I would Think that we at least get a double top here as in January, maybe. Let's see what happens! Good Luck Foot! :^)
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