Morning Comment: Big Bearish Bets in the Options Market


  • Yesterday’s decline came on jump in volume, but it was far from a disastrous day.
  • The recent action in the semis and banks have made us more constructive on the market.
  • HOWEVER, there have been some new concerning developments this week.
  • Some major bearish bets have been initiated over the past week in the options market.
  • Those positions have NOT been limited to the VIX. We’ve seen it in the IWM & HYG as well.
  • In other words, it might not be only the mysterious investor, “50 cent”.
  • Somebody thinks they know something, so “buyer beware” (at least over the next 2 months).


Poor day yesterday, but far from a disaster

After making a new record high on Wednesday, the stock market pulled back yesterday…on a day where all of the S&P groups declined…and the volume was the highest of the month. That volume was still only 3bn shares…and the breadth was only 2.4 to 1 negative…and the S&P was able to hold the 3,00 level…so the action was far from a disaster. (This is especially true given that the S&P hit a new record high the previous day.)

Getting more constructive on the market, BUT.......

Back in the very beginning of June, I called for a strong short-term bounce for the stock market, but I did not think it would last as long as it has…or go as far as it has. However, I have become a bit more constructive more…based on the continued positive action in the semis, the banks, and broad market itself. This does NOT mean that I'm going to raise a green flag on the stock market. I won’t do that unless or until the semis rally more meaningfully above its old highs…AND the S&P 500 moves above 3,030 I’ve been harping on recently. (That level would finally confirm that this all-important index had finally broken above its old highs in a significant way…and has not “failed” like it did the last three times it made a record high over the past 19 months.)

As good as these developments (in the semis/banks) have been, there has also been a negative development in the past week that is very much worth highlighting. I’ve seen a big pick-up on bearish bets in the options market…which includes some major buying of puts on the IWM Russell 2000, puts on the HYG high yield ETF, and very large purchases of calls on the VIX volatility index. (Since the VIX rises when the stock market declines, buying calls on the VIX is a bearish bet, not a bullish one.)

Major call buying in the VIX...and put buying in the IWM & HYG

Much of the call buying on the VIX has been attributed to an investor known as “50 cent”. This unknown investor bought a slew of VIX calls at many different times during 2017 and 2018 and paid $0.50 (or within a few pennies of 50 cents) for those calls each time. The investor lost a lot of money…UNTIL he/she reportedly made a fortune during the 4th quarter of last year. Sure enough, there were some sizeable VIX options trades executed at/near the 50 cent level this week on VIX calls over the past few days, so it looks like this mysterious investor is back. People are not overly concerned about this development…because there was a big gap between when they started buying VIX calls and when the bets finally paid off the last time. HOWEVER, we’ve seen some other VIX calls purchased at levels higher than $0.50…and more importantly, I’ve also seen some very sizeable put buying in the IWM…and on the HYG. These were initiated via put spreads, but they still spent millions of dollars on these trades.

These options will only work if the market drops sharply & quickly.

ALL of these options were purchased at levels that were WELL out-of-the-money…AND at time frames that were quite short. They only go out to August or September. This tells me that the investor (or investors, plural) who are making these bets are very confident that the stock market is going to see a substantial decline over the next two months. In other words, they know something (or at least think they know something)……The thing is, experience tells me that whenever we see a high concentration of bearish bets, they’re almost always right.

Concentrated bearish bets are much different than a high put/call ratio

This not like the times when the put/call ratio rises to 1.40 or higher…when “the masses” buy a lot of puts in a panic…at the end of a serious decline. This is much different. When a small number of investors buy very large positions in “puts” at a time when the market is rallying, it’s NOT a “contrarian indicator”…like it is when “the masses” are buying “puts” hand over fist during a serious decline. When it takes place in a way like it is right now, these players are almost always correct. (They HAVE to be correct…because these investors are spending A LOT of money…on positions that will go to ZERO in very short order…if the market does not decline sharply and quickly!!!!) The decline doesn’t always begin immediately, but it never takes very long at all to get going.)

The details of the options trades I'm talking about:

Let’s review the details of these trades. For the VIX calls, somebody bought 87,000 Sept $23 calls (paying $0.58)…and bought 83,000 August $19 calls (paying $0.50) on Tuesday. Wednesday, somebody paid $0.57 for 29,000 VIX Sept $23 calls. Then yesterday, somebody paid $0.45 for 125,000 VIX Sept $24 calls…and then there was one that was one trade that was not near 50 cents. Somebody paid $0.63 for 90,000 VIX Aug $20 calls.

Away from the VIX, we saw some sizable put spreads on Tuesday in the IWM. It was an August 23rd 143/146 put spread…where the investor paid 33 cents for 85,000 contracts. (So they spent over $2.8 million on a bet/hedge that will not work unless the IWM drops more than 5% in just one month!)……We’d also note that there has been some sizeable out-of-the-money puts on the HYG purchased in the market place over the last week or so as well. These ones consisted of purchases in the hundreds of thousands of dollars…rather than the millions (like the other trades we’ve highlighted this morning)…but they have strike prices of $80 & $82 (that expire in just 3 weeks). That’s still making a big bet that a significant decline in the high yield market is going to take place over a very short time frame.

Sophisticated investor don't make these bets unless they know something

Therefore, in the last week, a very small number of investors have purchased more than $10 million of options that will be worthless if the stock market does not decline in a material way by late August and/or late September. (There were actually some even larger trades executed in the VIX yesterday...in the August $20 and $24 calls...so the dollar amounts have only grown.)..........Even if it’s “just a hedge”…instead of a directional bet, it doesn’t matter in my mind. The person will lose a lot of money unless the market goes down quite a bit over the next month. If the market stays steady or rises, their bet/hedge will go to zero. So whether it’s a hedge or a directional bet, they wouldn’t make it unless they thought they knew something.

Of course, these developments do not guarantee that a substantial decline it going to take place over the next two months. Besides, it could merely provide another excellent buying opportunity for investors…and not signal the beginning of a new bear market. However, experience tells me that when a large number of bearish trades are made by a concentrated number of investors, the rest of us should become very cautious about the direction of the stock market over the next few months.



Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder BTFNow.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jul 26, 2019 — 8:07 AM
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