Stocks keep grinding higher, and one trader is inching up protection on the small-cap index.
Check out this morning’s options activity in the iShares Russell 2000 ETF (IWM):
- 52,825 September 145 puts were sold for $0.12
- 52,825 September 142 puts were bought for $0.08.
- Volume was below open interest in both contracts.
This trade appeared at the same second:
- 52,825 27-September 150 puts were bought for $0.89.
- 52,825 27-September 147 puts were sold for $0.48.
- Volume was above open interest in both contracts.
What’s it mean? Based on the open interest and different expirations, an investor seems to be using a put spread as a hedge. He or she apparently implemented the strategy when IWM was lower, and rolled it to the higher strike today.
Closing the September 145-September 142 put spread recovered a small credit of $0.04, the difference between $0.12 and $0.08. That reduced the cost of the new position from $0.41 ($0.89 minus $0.48) to $0.37.
IWM rose 1.38 percent to $155.98 in afternoon trading. The fund has been in a tight range all year as investors worry about slower economic growth hurting smaller companies. Today’s option trader probably has a long position tracking in the index and is using the put spread to protect against a drop.
How The Put Spread Works
Because long puts fix the level where an investor can sell a security, they gain value when prices fall.
With spreads, traders also sell contracts further from the money. That generates income and reduces their cost. The overall result is a position that leverages a move between the two strike prices. (See our Knowledge Center.)
The put spread exited today would have collected $3 from IWM dropping under $145 down to $142. The new spread will make the same amount from a decline through $150 to $147.
Aside from raising the price level, today’s roll provided the investor with an additional week of downside protection.
The trade was the largest transaction in the entire options market so far in the session.