As options on the S&P 500 became more expensive Monday, one big trader "SPY"-d an opportunity.
On Monday morning, one option trader took advantage of the uptick in the VIX to sell out-of-the-money puts on the S&P 500 ETF (SPY) expiring this week. This trader sold 40,000 152-strike puts expiring this Friday for $0.26 each.
By selling this option, the trader commits to buying the SPY for an effective price of $151.74 if it is below $152. If the SPY stays above $152, then this trader will make $0.26. Therefore, this is a trade that will create income if the market is up or unchanged—and allows the trader to buy the market into weakness.
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Options experience exponential time decay as expiration approaches, which make selling weekly options a lucrative trade. When you sell weekly SPY puts, the risk is that the market makes a sharp move down, and the puts increase in price rapidly.
As long as the puts are sold cash-covered, i.e. do not use leverage, then the position has less risk than a long stock position. Over time, put-write strategies have been shown to produce better risk-adjusted returns than a buy and hold strategy, which is why this is our preferred way to be invested in the market going in to the seasonally volatile summer months.
I am actually short a similar put, along with owning the SPY, and also being short calls. Collecting income from options in a market that seems to be trying to feel itself out at this point is an effective way to pick up some alpha—or in other words, to outperform the market.