Cautious investor buys huge put spread in Spiders fund

* SPY put spread would profit from a 4.6 pct fall

* Spread bought ahead of minutes from Fed’s latest meeting

By Doris Frankel

CHICAGO, Oct 12 (BestGrowthStock) – One big investor on Tuesday is
apparently bracing for a significant decline in the S&P 500
index (.SPX: ) of at least 4.6 percent within the next month.

The cautious player set up a massive bearish put spread on
a popular exchange-traded fund known as the Spiders that
mirrors the performance of the S&P 500. The fund is designed to
equal roughly one-tenth the actual index.

The S&P benchmark rose 0.38 percent to 1,169.77 while the
SPDR S&P 500 ETF (SPY.P: ) was up 33 cents to $116.99.

The S&P is now up 11.5 percent since the start of
September, and last month’s performance was one of the best
months for stocks in a decade.

The trade involved the November $110-$112 put spread and
was initiated early in the trading session when the S&P 500 was
briefly under pressure as China’s bid to cool down its economy
sparked concerns it could crimp global growth.

“U.S. stocks (Read more about the stock market today. ) have had a terrific run up since the end of
August, but bullish momentum hit a speed bump this morning amid
renewed concerns the Chinese economy may slow down” said
Caitlin Duffy, equity options analyst at Interactive Brokers
Group in Greenwich, Connecticut.

Traders like Spider options because the fund is liquid,
actively traded and offers an efficient way to play market
trends. They can also utilize options as part of their
strategies and hedging techniques to protect stock positions.

“It’s not out of the realm of possibility that the S&P 500
will surrender roughly 50 percent of recent gains and the
activity in the November put options on the fund suggests an
investor is determined to be protected should the pullback
become a reality,” Duffy said.

Tuesday’s unusual put trade was on traders’ radar screens.
Turnover on the ETF’s put options, contracts which give the
right to sell the shares at a fixed price up to a certain date,
was heavy.

“It’s not easy to make a splash in Spider options, given
they lead the market almost every day with an average daily
volume of 1.7 million contracts but put volume is well above
normal,” said Henry Schwartz, president of options analytics
firm Trade Alert in New York.

In all, about 1.34 million puts and 573,000 calls traded in
the Spiders. The spread traded on CBOE for an average price of
42.5 cents per contract, Schwartz said.

The put player purchased 100,000 puts at the November $112
strike and sold the same number of puts at the lower November
$110 strike, resulting in a total premium of $4.250 million.

The trade is profitable if the fund’s shares fall about 4.6
percent from its current price to trade below the break-even
point of $111.575 by November expiration.

Maximum potential profits of $1.575 or $15.750 million are
available to the put spreader if the Spiders fall below $110.0
by November expiration, Duffy said.

The last time the fund traded below $110 was on Sept 8,
which it hit an intraday low of $109.81.

“The trade is a way to hedge in case the earnings season is
a disappointment,” said TD Ameritrade chief derivatives
strategist Joe Kinahan.

(Reporting by Doris Frankel; Editing by Andrew Hay)

Cautious investor buys huge put spread in Spiders fund