Weekend Sunday August 26, 2012
An alert reader of TMP sends this observation
I hear Jon Najarian identify unusual options activity on CNBC. And I can't think of a single time when these reports turn out to be duds. He is saying big institutional money bought the December 152 SPY calls, which basically is wagering that the S&P goes to 1520 by the end of the year. The amount of options traded translates to the equivalent of 6 million shares which sounds like a huge bet to me.
So I took a look and sure enough there it is, 60,279 contracts of open interest. I mention this as a lesson. The fund could have done this for two reasons.
One would be an outright bet that indeed the markets were going to close over 1520 by year end.
The other possibility is that the fund is short and wants to hedge the possibility that they could be mistaken. If they are short six million shares, they are hedged or insured to get some breathing room to get out by betting on call options that the stock market goes up.
Well there are other posibilities of all sort of exotic option strategies but I suspect this is one or the other.
However, these options must be unwound by expiration. Therefore a large open interest as we approach options expiration on the third Fridays can be interesting as it tends to drive the market to that expiration price. Option data tends to be more valuable when an extreme is reached in put or call buying as in November 2008 or March 2009.
Most of the money in options is made by the people on the trading floor that generate options, never forget that....
Thanks to our reader for this observation!