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(Bloomberg) – A trader has just established a massive hedge position via options to protect a portfolio of stocks in case the S&P 500 losses snowball to 20% in the fourth quarter.
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The trader on Thursday morning bought 45,300 put-spread collars – option cocktails that combine various strike prices in a single strategy – on the S&P 500 for $ 94 million. The order involved the writing of call options with an exercise price of 4,505, the purchase of put options exercising at 4,135 and the writing of put options at 3,480, all of which expire on December 31st.
Behind the bet was likely the belief that the S&P 500 rise would be capped at 4,505, a 3% gain from the index’s close on Wednesday at 4,359, while the decline could be as low as 4,505. 20%.
“It’s a portfolio protection trade,” said Alon Rosin, head of institutional equity derivatives at Oppenheimer. “It was a particularly large bearish trade.”
How many protections? The maximum value of the position could reach $ 2.9 billion, according to an estimate by Chris Murphy, co-head of the derivatives strategy at Susquehanna. This could help soften the blow to the underlying equity holdings.
Murphy notes that the exercise of a put in the trade is 4,135, exactly the moving average of the S&P 500 over the past 200 days, and that the strike price of the call is below the all-time high of the The index of 4,536.95 reached on September 2.
“The upper hit of that put-spread kicks in if we actually break the 200dma, and covers a lot of room on the downside if there’s an air pocket underneath,” Murphy said. “In the meantime, the upside call is well below the early month highs and appears to be closer to the spot than usual, so this hedger may think the upside will remain muted until the end of the month. ‘year.”
The put-spread collar was part of a transaction that also included a buy order for 25,800 deep-in-the-money S&P 500 buy contracts that expired Thursday with a strike of 4,150. For Danny Kirsch, head of options at Cornerstone Macro LLC, this is an open trade to make the entire transaction “delta neutral”, which means it will have limited immediate directional impact on the benchmark. He notes that a similar put-spread collar has often been initiated at the end of a quarter in recent years.
Anguish grows in the market as the S&P 500 fell nearly 5% in September for the worst month since March 2020. Stocks fell as surging bond yields accompanied concerns about the public debt ceiling and China’s real estate problems.
(Updates with closing prices)
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