Is the Nightmare Over? Options Trader Sees Huge Rebound

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October was a painful month, but now a big options trader is looking for the entire selloff to reverse.

Here’s a breakdown of the massive call volume detected yesterday morning in the market-tracking SPDR S&P 500 ETF (SPY):

  • A block of 75,000 December 288 calls was bought for $0.19. By the end of the session, they more than doubled in value to $0.52.
  • At the same second, another block of 75,000 December 289 calls traded for $0.16. They also spiked 160 percent to $0.42 before the closing bell.

Those quick profits mostly came from Federal Reserve Chair Jerome Powell’s dovish comments triggering a sharp rally. But options Greeks also played a big role.

Let’s start with Delta. (“D is for direction.“) This number says how much an option changes value from moves in the underlier. Both contracts both had a miniscule 2 deltas when they were purchased.

Then you have Gamma. (“G is for gaining Delta.“) Both contracts started with about 1 gamma. SPY rose more than $5 from the time of the trade until the closing bell, which is why the contracts gained 5-6 deltas by the close.

SPDR S&P 500 ETF (SPY) with 50-day MA and early-October breakdown zone.

The trade is a classic example of generating leverage with options. Even if you can’t read Plato’s Republic, you can still translate Delta and Gamma into “mucho dinero.”

SPY ended the session up 2.30 percent to $274.58 — its biggest daily gain since late March.

There’s something else noteworthy about Wednesday’s options action: The 288 and 289 strikes match exactly the area where SPY traded in early October before knifing through its 50-day moving average. So, if they go in the money it would represent a rebound from almost the entire crash.

Disclosure: This post is intended for educational purposes only. Options trading may not be suitable for all investors.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.