Twenty-five years ago, I sat at my computer in my home office in Toronto, researching a New York-based, publicly traded toy company. Its name escapes me. Not important.
In those days, pre-Reddit and StockTwits, message boards were the place you went to get the scuttlebutt about companies you were interested in. I was browsing the toy company’s message board pre-market when I started seeing strange comments unrelated to the company’s business.
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People wrote that a plane had hit the World Trade Center. If it were just one message, you might think it was someone's idea of a sick joke. But when they kept coming, I turned on the TV and that memory is permanently etched in my brain. And I was 500 miles away.
The people of New York are in my thoughts today as they revisit the terrible tragedy that unfolded in their city 25 years ago. I’m sure they’re in yours too.
Whether you’re American, Canadian, or any other nationality, we can never forget that terrible day.
In yesterday’s unusual options activity, 3 of the top 10 Vol/OI (volume-to-open-interest) ratios for ETFs caught my attention for no particular reason other than it’s a nice change of pace from individual stocks.
3 ETFs. 3 unusually active options. 3 different bearish options strategies.
Peace and love.
State Street Consumer Discretionary Select Sector SPDR ETF (XLY)
The State Street Consumer Discretionary Select Sector SPDR ETF (XLY) Sept. 21 $107.50 put had the second-highest Vol/OI ratio yesterday at 73.84. The put’s volume of 44,523 accounted for 44% of the ETF’s daily volume, which was 6.9 times the 30-day average.
The options flow from Thursday points to a Bear Put Spread.
A bear put spread is a defined-risk, bearish bet that XLY’s share price will decrease in value over the next 99 days. It involved the institution buying the Dec. 18 $112.50 put at $4.67 and selling the Dec. 18 $107.50 put for $2.90 in premium, a net debit of $1.77 [$4.67 trade price - $2.90 trade price]. The net debit is also the maximum loss. You achieve the maximum loss if the share price is above $112.50 at expiration.
The maximum profit is $3.23 [$112.50 strike price - $107.50 strike price - $1.77 net debit]. The maximum profit percentage is 182.5% [$3.23 / $1.77], while the risk/reward ratio is 0.55 to 1 [$1.77 / $3.23]. Maximum profit occurs if XLY is below $107.50 on Dec. 18. You make money if the share price is below $110.73 at expiration.
By doing a bear put spread, the institution cut the cost of buying downside protection for XLY by 38%—a wise move.
Roundhill Memory ETF (DRAM)
The Roundhill Memory ETF (DRAM) March 19/2027 $45 put had the fifth-highest Vol/OI ratio yesterday at 36.55. The put’s volume of 22,110 accounted for 8.5% of the ETF’s daily volume, which was slightly below the 30-day average of 274,570.
The options flow from Thursday points to a 1:2 Put Ratio Spread.
This 1:2 put ratio spread is a neutral-to-slightly-bearish bet. It involved the institution buying 10,000 March 19/2207 $55 puts for $7.74 million, while selling 20,000 March 19/2027 $45 puts for $7.24 million in premium, for a net debit of $500,000.
A simpler way to think of a 1:2 put ratio spread is that it’s the combination of a bear put spread -- buy one $55 put and sell one $45 put -- and a naked put selling a second $45 put, hence the 1:2 imbalance.
The net debit of the bear put spread part of the combination is $4.12 [$7.74 trade price - $3.62 premium], which is also the maximum loss. You achieve the maximum loss if the share price is above $55 at expiration.
The maximum profit is $5.88 [$55 strike price - $45 strike price - $4.12 net debit], or $5.88 million based on the 10,000 contracts. The maximum profit percentage is 142.7% [$5.88 / $4.12], while the risk/reward ratio is 0.70 to 1 [$4.12 / $5.88]. Maximum profit occurs if DRAM is below $45 on March 19/2027. You make money if the share price is below $50.88 at expiration.
That’s the defined risk part of this options strategy. The naked put is the undefined risk.
Let’s assume the share price falls to $0 at expiration. The institution's loss on the 10,000 uncovered short puts would be $41.38 million [($45 strike price - $0 share price * 10,000 contracts * 100) - ($3.62 premium * 10,000 * 100)]. Its gain on the bear put spread would be $5.88 million.
Therefore, the loss on the entire 1:2 put ratio spread in this situation would be $35.5 million.
The institution would lose money on the 1:2 put ratio spread if the share price at expiration is below $35.50 and above $54.50.
iShares MSCI Brazil ETF (EWZ)
The iShares MSCI Brazil ETF (EWZ) had five unusually active options in yesterday’s trading, but the Nov. 20 $49 call and Nov. 20 $47 call stand out for me, mainly because of volume; they’re high and fairly similar. That usually points to a specific bet that’s confirmed in the options flow.
As you can see above, there were two 35,000-contract trades at 11:07 a.m. ET yesterday. They accounted for 80.6% of the two calls’ total volume on the day. The trade price on the $47 strike is below the bid, suggesting the institution placed a Bear Call Spread, a bearish bet on EWZ. It’s the call version of the vertical spread used for XLY covered earlier.
The strategy involved the institution selling 35,000 Nov. 20 $47 call contracts for $2.485 million premium [$0.71 * 35,000 * 100] and buying 35,000 Nov. 20 $49 call contracts for $1.715 million [$0.49 * 35,000 *100], for a net credit of $770,000, or $0.22 per share.
The numbers below are the $47/$49 bear call spread combination from late Friday morning trading.
At first glance, one might think, “Why would someone risk $10.11 for $1 in profit?”
It’s simple: the chance of losing money is extremely low. Deep ITM (in-the-money), the maximum loss is $1.82 in this example ($1.78 for the 35,000-contract trade). For that to happen, the ETF’s share price would have to increase by 28% over the next 70 days to above $49. The expected move is less than half that.
The maximum profit of $0.18 ($0.22 in yesterday’s trade) is achieved if the share price in November is below $47. EWZ would have to rise 22.7% to mess that up. Also, unlikely. The institution keeps its net credit of $770,000.
That adds up fast if you repeat it every couple of months or so.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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