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November 8, 2013  Fri 3:16 AM CT

SPX: SEE CHART GET CHAIN FIND STRATEGIES
Large trades in the S&P 500 Index options are betting on lower volatility.

optionMONSTER systems show that 790,000 SPX options traded yesterday, about 50 percent above its daily average for the last month. The big print of 11,928 was in the January 1690 puts, which was sold for $18.50. That is a bet that the SPX will remain above 1690 through the beginning of next year.

A bit later the second-largest trade lit up our scanners, a block of 3,000 December 2015 850 puts that was sold for $10.50. This is a longer-term bet that any downside in the SPX won't be extreme.

The volume was well above open interest at each strike, indicating that these are new positions. And because the S&P 500 Index options settle in cash, the put sellers don't face the possibility of having to buy shares if the SPX is below the strike prices at their respective expiration dates. (See our Education section)

The SPX was down 23.34 points yesterday, or 1.32 percent, to close at 1747.15. It was below 1690 a month ago but hasn't been under 850 since the lows of early 2009.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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