Hedging Is an Afterthought for Traders With S&P 500 Near Record

  • VIX down in December, at lowest monthly average since August
  • Strategists see more gains for the S&P 500 next year

How to Play the Record Setting Stock Rally

Fresh off three straight record closes and with call volume at all-time highs, options traders are adding to bullish bets on the S&P 500 Index. They’re paying the least since July 2014 to protect against a decline in the SPDR S&P 500 ETF Trust before Wednesday’s Federal Reserve rate decision.

  • The surge in optimism has sent the cost of options betting on a 10 percent gain in the S&P 500 to record levels relative to at-the-money contracts. While SPDR S&P 500 ETF Trust calls were among the most traded Monday, the bullishness was especially notable Friday, when an opening block trade of 70,000 December $232.50 calls changed hands at the same time as a block of 35,000 December $230 calls.
  • The CBOE Volatility Index has lost 5.2 percent in December and is trading at its lowest monthly average level since August. It climbed in the past four Decembers.
  • Strategists are bullish on the S&P 500 for next year, betting it will rise to 2,317 by the end of 2017, according to the average of 11 forecasts compiled by Bloomberg.

Bullish investors who are skeptical of the S&P 500’s torrid pace of gains should buy call spreads, Credit Suisse Group AG equity-derivatives strategist Mandy Xu wrote in a Dec. 12 note to clients. She recommended using the strategy on stocks such as JPMorgan Chase & Co. and Transocean Ltd., which have rallied more than 10 percent since the presidential election, surpassing their 52-week highs, while the cost of bullish options on the shares has remained relatively stable.

Here are some other notable S&P 500 options statistics:

  • Call volume on the S&P 500 surged to a record high of more than 1 million contracts on Dec. 8, compared with less than 880,000 bearish puts.
  • Short interest on the S&P 500 ETF sits at 2.8 percent of shares outstanding, 1.7 percentage points lower than the one-year average, Markit data show.
  • The ratio of outstanding bearish options relative to bullish ones on the fund was at 1.8 as of Friday, in line with its one-year average.
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