Global stocks have enjoyed a strong rally since 2017 began, but now traders are getting nervous.
Heavy put volume was detected Monday in the iShares China Large-Cap Fund (FXI) and the iShares MSCI Emerging Markets Fund (EEM), two of the most popular international ETFs. Puts are options to sell a security.
- FXI appeared on the tape less than an hour into the session, with 29,000 February 36.50 puts bought for $0.27. Given that puts fix the price where an asset can be sold, the position will make money to the downside. For instance, a drop to $36 by next Friday will more than double the trader’s money. A return to the December low of $34 would inflate the options by more than 800 percent to $2.50. If it remains above the strike, the puts will become worthless.
- FXI rose to $36.79 and is pushing along the top of its recent range. The fund struggled after Donald Trump won the U.S. Presidency in an upset victory on Nov. 8 but started rallying in late 2016 as the country’s economic data improved.
- EEM’s transaction was a roll out (when an expiring option is being replaced with an identical trade with a later expiration) from the 20,000 March 31 puts into the April 34s. It cost $0.22 per contract but raised the level at which they’re hedged by $3. The fund, which tracks a wider range of countries, slid to $37.66 but has also outperformed in 2017. It last saw $34 on Dec. 22, the same time FXI bottomed. The puts will lose all their value if EEM stays above $34 through the third Friday in April.
Monday’s trades come as newly inaugurated President Trump clashes with corporate executives over immigration and foreign leaders over trade policy. The market, however, seems to have remained calm amid strong economic data, along with hopes of tax and regulatory reforms.
Traders also sought protection on domestic assets, snapping up 40,000 31-March 205 puts on the SPDR S&P 500 fund (SPY) for $0.45. A block of 40,000 31-March 185 puts was sold at the same time for $0.13, resulting in a net outlay of $0.32. This complex strategy, known as a vertical spread, can lower cost by selling one contract to partially pay for a more expensive one. Significant leverage can result, but the debit will be lost if no drop occurs.
In this case, it would earn 6,100 percent from SPY falling 19 percent to $185 -- a price it hasn’t seen since the market’s current rally began last February. The use of quarterly options suggests it was the work of a major institutional investor. SPY is currently at $228.93, less than 1 percent below its all-time high.
Overall option volume was heavily skewed toward the downside in all three instruments. Puts outnumbered calls by 6 to 1 in FXI, 4 to 1 in EEM and 3 to 1 in SPY, more than twice the usual ratios.