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Giant S&P 500 Options Trade Made to Guard Against 20% Swoon


(Bloomberg) — A trader just established a massive hedging position via options to protect a portfolio of stocks in the event that the S&P 500’s losses snowball toward 20% during the fourth quarter.

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The trader Thursday morning bought 45,300 put-spread collars — options cocktails that combine various strike prices in a single strategy — on the S&P 500 for $94 million. The order involved selling calls with a strike price at 4,505 while buying puts exercising at 4,135 and selling puts at 3,480, which all expire on Dec. 31.

Behind the wager was likely a belief that the S&P 500’s upside would be capped at 4,505, or a 3% gain from the index’s Wednesday close of 4,359, while the downside could be a drop of as much as 20%.

“It’s a portfolio protection trade,” said Alon Rosin, Oppenheimer’s head of institutional equity derivatives. “It was a notably sized bearish trade.”

How much protection? The position’s maximum value could be worth $2.9 billion, according to an estimate by Chris Murphy, Susquehanna’s co-head of derivatives strategy. This could help soften the blow to the underlying stock holdings.

Murphy notes that one put’s strike in the transaction is 4,135, exactly the S&P 500’s moving average in the past 200 days, and the call’s exercise price is below the index’s all-time high of 4,536.95 reached on Sept. 2.

“The top strike of this put-spread kicks in if we do actually break the 200dma, and hedges a lot of room on downside if there is an air pocket below,” Murphy said. “Meanwhile, the upside call is well below the highs from earlier this month and appears to be closer to spot than usual, so this hedger may believe upside will remain muted into the end of the year.”

The put-spread collar was part of a transaction that also included an order to buy 25,800 deep-in-the-money S&P 500 call contracts that expired Thursday at a strike of 4,150. To Danny Kirsch, head of options at Cornerstone Macro LLC, that’s an opening trade to make the entire transaction “delta neutral,” meaning it will have limited immediate directional impact on the benchmark. He notes that a similar put-spread collar was often initiated at the end of a quarter in the past few years.

Angst is growing in the market as the S&P 500 dropped almost 5% in September for the worst month since March 2020. Stocks tumbled as surging bond yields accompanied worries over the government debt ceiling and China’s real estate problems.

(Updates with closing prices)

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