It's been a horrendous few weeks for stocks, with the slipping 7 percent from its mid-September highs. But one options trader appears to view this as the perfect time to take off protection, perhaps due to a prediction that the market has already found its bottom.
As the market sank on Monday, one trader appeared to express a view that the selling was over by closing out a bearish position on the SPDR S&P 500 ETF (which trades under the ticker symbol SPY). Specifically, in one of the day's biggest options trades, a trader sold 50,000 November 185/180 1-by-2 SPY put spreads for $1 each, collecting $5 million in premium.
A put gives a trader the right to sell a stock at a given price and time, and a put spread is a way to mitigate the cost of buying one of these bearish options. This trade thus provided downside protection on the SPY ETF, which is a proxy for stocks as a whole. But because the trader is closing this trade rather than opening it, the trader appears to believe that it won't get much worse for the market in the month ahead.
"When you think about what's going on here, we had all this put buying on Friday when things started getting panicky, and then when the SPY kind of settled down today, maybe they were looking to take off this short-term hedge," RiskReversal.com's Dan Nathan said Monday on CNBC's "Fast Money."
Still, puts were in high demand on Monday as the selling accelerated through the session. The S&P ETF's implied volatility, which is a measure of options prices, closed at a two-year high.
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"We have traders running for hedges, and we have them looking to take them off quickly," Nathan said.
The bottom line is that as markets get rocky, investors "are looking to protect their gains in stocks, or hold on to gains—and stay in the game."
