Risk-Off is On to Stay, Options Say

With the Federal Reserve soon to pull the plug on QE2, and data showing no fundamental reason for energy prices to maintain recent heights, the market has begun turning its back on risk trades and sent share, and barrel, prices lower over the past week.

Crude oil has been on a downtrend since hitting a one-year high on May 2, off about 14%. Some may see this pullback as a chance to get in on what, until recently, has been a powerful commodities rally. Options investors, however, are betting on a sharp decline in oil prices over the next several months.

Investors in the SPDR S&P Oil & Gas Exploration & Production ETF, which closed Wednesday at $57.84, bought the Sept. 47 puts 22,000 times.

"The buyer of this would be expecting a major drop in the price of oil between now and September, as this represents about a 17% decline in the stock price," said Jim Iuorio, TJM Institutional Services Director.

Meanwhile, options investors are also positioning for a longer-term correction in the stock market. A trade in the June 18 calls in the SPDR S&P 500 ETF has the market falling 10% from here in a month, Iuorio notes. The SPY recently traded near $135.

"It seems like it is going to be rocky for a couple of weeks as the commodity correction drags down stocks as part of 'risk off,'" he said.

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