The CBOE Volatility Index (VIX) closed at multi-month highs of 19.08 Wednesday, and while it slid a bit on Thursday, we are still looking at general volatility levels well above what we were looking at two months ago. The total ratio of puts to call traded across all the exchanges rose to 1.08 Wednesday and remained high at 1.15 yesterday (excluding ex-dividend trading activity), which are also multi-month highs.
Shares of Apple (AAPL) have slid 20% from their $700 handle highs, having a psychological impact on retail traders who have enjoyed a very profitable ride from the $570 range this summer. In addition, large blocks of puts traded in some of the exchange-traded funds reflect the bearish underlying sentiment as well.
The largest block of options to trade Thursday was in the iShares Emerging Markets Fund (EEM). Shares are ticking a bit higher this morning, up $0.10 to $41.02, and the big trade in the ETF was a 104,000-contract block of November 40.5 puts for $0.38 per contract. An investor bought the block, according to a source on the exchange floor. The trade represents the largest single block of options traded across the exchanges in weeks. Today's open interest numbers indicate the hefty premium purchase is an opening or new position. November 40.5 puts on EEM are 1.3% out-of-the-money and expiring at the end of next week.
A second big print Thursday surfaced in the SPDR Financial Fund (XLF). Shares are up $0.02 to $15.50 and 96,500 January 15 puts traded on the ETF for $0.38 per contract, electronically on ISE. Data from ISE is reporting a customer bought the puts and today's open interest numbers confirm that a new position was opened. The contract is 3.2% out-of-the-money and expiring in 10 weeks.
While the softening of VIX in the face of a down market may be taken as a sign that panic is not in the mix, I don't believe that decline tells the entire story, since the volatility buildup into the election will take some time to unwind, I am focusing more on the large blocks of puts in the ETF market as a sign of concern and/or hedging activity among some big "smart money" players. In addition, the total put-to-call ratio is spiking to multi-month highs, suggesting the recent market down turn has indeed triggered a dramatic shift in investor sentiment.
With only 52 days until year end, and SPX up more than $100 points (7%) on the year, I think we will see more aggressive hedging to lock in a decent year among investment managers. While basic hedging is actually a positive for the market (those who hedge don't need to sell their shares into a decline!), I would still expect a few more 2% to 4% down days this month, with a nervous sideways trading into early December as all eyes focus on Washington and the 'cliff'.
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