Twenty minutes after the opening bell on Thursday, an investor unwound a bearish spread in August options and entered a similar position in December options (WSJ article). Not really that newsworthy until you find out that the trade involved 720,000 options contracts on the SPDR Trust Series 1 (SPY), representing about half of the volume traded on the SPDR fund on a daily basis. As mentioned by the WSJ:

The investor who pulled the trigger on this trade appears to have set up a bearish "one-by-two put spread" in December options -- buying December $95 "puts," which convey the right to sell the fund, and selling twice as many December $82 puts.

Apparently someone else is also not too impressed with recent revenue and earnings numbers, or at least wants to protect recent gains. See the following links for more information on the bear put spread here, and bear ratio spreads, such as the one-by-two, here. It will be interesting to see how quickly the trades pays off, if at all. Microsoft certainly helped the bears after the bell Thursday.

Implied volatility has recently decreased on the S&P 500 Index options. As mentioned in Barron's: "This follows the Federal Reserve's decision to finance investment banks, seen by many investors as the equivalent of a massive put option that reduces the future possibility of extremely low stock prices." Many options investors are going cash. The low volatility reduces the premium for selling options, while the recent actions in the market (poor news and little upside, Fed propping up various industries) currently makes both long call and long put options suspect, even with lower prices.

What could cause a change? Many believe either continued poor earnings season, or a drop in consumer spending. In a recent post we discussed the lower returns generated during earning season over the last 5-6 years. Credit Suisse recommends that to hedge against poor corporate earnings, investors should take out a bear spread, buying S&P 500 SPY May 135 puts, while selling May 125 puts. Goldman Sachs gives a similar position bias, but recommends hedging with SPY puts that are 5% out of the money. As mentioned in Barron's, "Those are both good ideas, as GE's earnings shortfall may signal more bad news and rising options volatility."

Tickers: SPY