I spent the day with my academic hat on at Ohio University in Athens discussing all things VIX, SPX, and RUT along with answering some questions about the Social Media indexes that are quoted by CBOE. There were also some questions about the French Election and the potential impact on the US markets. I noted that VSTOXX futures have been elevated in anticipation of the French election, but that there wasn’t too much going on in the US, yet. Yet is the key word because as I play work catch up I noticed that over 80,000 May 12th SPX Weeklys traded today. That’s multiples of the average volume of 6,000 contracts for this series.
It turns out the majority of the trading in May 12th SPX contracts was in four different options with two being sold and two being purchased. SPX was a tad over 2349.00 when the trade was executed. The SPX May 12th 2290 Puts were purchased for 23.00 as were the SPX May 12th 2165 Puts for 7.90. Calls were sold with the SPX May 12th 2395 Calls bringing in 13.50 and the SPX May 12th 2435 Calls taking in 4.40. When all these premiums are added up it comes to a cost of 13.00 per spread with about 19,000 spread trades being placed. The payout at May 12th expiration appears below, but it is possible this trade will be held that long (explanation follows).
The trade by itself, with a 13.00 cost, needs a 3% drop at May 12th expiration to break even. The timing of this expiration is the first SPX settlement available after the second round of the French election scheduled for May 7th. If SPX is below 2165 (7.8%) then the spread is two times short the S&P 500. Things are a little tighter on the upside. SPX up only 1.9% results in the first short call starting to gain in value and a 3.7% move doubles the losses.
As I investigated this trade it appears that it was rolled from a similar position that was put on in the April 28th SPX options. That trade was at least partially initiated on March 16th. Hence my hedge clauses above such as ‘the trade by itself’ in the previous paragraph. When I dig into the spread that was set to expire on April 28th (which is just after the first round of the French election process) the trail goes cold.
Upon return to Chicago I’ll definitely do more digging and see what I can find out. However, for now we know there’s some real interest in the May 12th expiration and the position that was initiated today does well if the market is lower at expiration. Oh yea and there’s an election in France that seems to now be catching the attention of the US markets.