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May 29, 2012  Tue 2:50 AM CT

SPY: SEE CHART GET CHAIN FIND STRATEGIES
A huge trade is positioning for a potential steep decline in the SPDR S&P 500 exchange-traded fund.

A trader bought 23,900 January 60 puts for the ask price of $0.31 at 7 times the previous open interest, so it was a new position, according to optionMONSTER's Depth Charge system. The trade was particularly noticeable because of the light volume in the SPY, whose options are the most widely traded on the market.

These SPY puts are more than 50 percent out of the money and have an implied volatility of 48 percent, with the VIX below 22. They also have a delta of 0.01, indicating just a 1 percent probability that they will be in the money by the time by their expiration. (See our Education section)

There is a chance that this is an outright bearish bet that the market will see a severe downturn this year, but the put buying is more likely a tail-risk hedge. Either way, it means that some large institutional trader is willing to shell out $740,900 for a bet that pays at expiration only if the SPY drops 55 percent in the next eight months. That is an unusual trade and another sign of the fear that we have been seeing build in this market.
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Options Academy: Ron's Risk Calculation--A Real Life Example

It is rare that I get a chance to give a real-life, real-time example in my articles that the readers were not only following but were actually involved in at the time the event is happening. Well, that is where we are right now in our QQQ trade from last week. Let's recap the trade itself.

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