Bulls Lurking Amid Tuesday Selloff: Options Recap


The S&P 500 dropped violently on Tuesday, but at least one big options trader was looking for a rebound.

A large bullish call spread was detected on the index-tracking SPDR S&P 500 ETF (SPY) about mid-way through the session. Spaced out into three blocks over a 49-minute period, here’s what it looked like:

  • 100,000 28-December 286 calls were bought for $0.38.
  • 100,000 28-December 287 calls were sold for $0.28.
  • It was the largest options trade in the entire market all session.

Long calls fix the price at which a security can be purchased. Selling them generates income and creates an obligation to deliver shares if a certain level is reached. (See our Knowledge Center.) Combining the two into a vertical spread reduces cost and creates the potential for significant leverage from a move to a specific price.

For example, Tuesday’s transaction cost just $0.10 and will return 900 percent if SPY closes at $287 or higher on expiration.

The fund closed at $270.25, down more than 3 percent. The spread’s target price roughly matches the area where SPY traded in early October before crashing through its 50-day moving average. It resembled another big transaction last week.

Two catalysts may determine the success of these large bullish bets: China and the Fed. Investors have been on edge as President Trump tries to wring trade concessions from Beijing. Interestingly, the Asian country’s Commerce Ministry expressed confidence this morning that it will reach a trade deal with the U.S. It seems to have been the first positive statement from China after last weekend’s G-20 meeting in Buenos Aires.

The Federal Reserve also meets on December 19. Confirmation of a dovish turn could potentially lift equities as well.

In conclusion, the S&P 500 is still languishing in a range. But one big trader is using options to position for a potentially big rebound into the year-end.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.