SPX draws short-term bet against crash
Chris McKhann | firstname.lastname@example.org
optionMONSTER systems detected the sale of 2,996 SPX Weekly 1275 puts that expire next week, going for the bid price of $0.05. These options, which are based on the index and have no single underlying, are cash-settled contracts that can be exercised only at expiration, though they can be traded any time before that.
This put-selling strategy is often known as "nickel selling," as in "picking up nickels in front of a steamroller." It has a high chance of profit, as the delta suggests a less than 1 percent probability that the SPX will be below 1275 at the end of next week, but the risks are significant. For example, if the SPX was down to 1274, the trader would lose $0.95--and obviously that would increase with any losses from there.
The VIX, which is based on the SPX options, is up to 16.18. The implied volatility of those out-of-the-money puts is 41 percent, so this is a volatility-selling strategy. The other risk in the strategy is that it is obviously highly leveraged to be able to get any profit out of it.
The SPX is down 22.76 points, or 1.45 percent, to 1551.81. The recent action in the index has driven its 10-day historical volatility up to 17.9 percent.