By: Angel Reyes
Investors this week used the options markets in an effort to protect against a market sell off. As our readers know, Dranger Capital Management ("DCM"), has been way out in front of this trading strategy as evidenced by its #2 ranking on Barclays.
Trading has been heavy in the S&P 500 ETF where traders bought twice as many put options than calls. Such a strategy, one that DCM employed throughout this summer, points to the possibility of the S&P falling off its recent highs.
DCM continues to follow its proprietary trading strategies to make money for itself and its clients with little more risk than general market risk.
Call today to talk to our CEO and portfolio manager Tony Rigas 866-460-3147, or send an email for more information to trigas@drangercapital.com .
Traders Position Themselves for S&P 500 Pullback
By ED WELSCH
Investors used the options market to buy protection against the possibility of a broad market pullback, a day after the four-week summer rally showed signs of sputtering.
Trading was fairly heavy in the S&P 500 ETF, where more than twice as many put options traded than calls, according to Track Data. The strong activity in puts, which give the right to sell the fund, suggested trading was focused on the possibility of a downdraft in the Standard & Poor's 500-stock index.
"This is clearly a sign of people running for cover and for some protection," said David Gompert, senior market analyst at TradeMonster. Put trading starting to pick up in September contracts also showed traders were getting cautious about the market going into the fall months, Mr. Gompert said, which have historically been "brutal" for the stock market.
One strategy traders pursued to protect against a market correction is called a "1-by-2 put ratio spread," and was seen Tuesday in third-quarter SPY put options, said Steve Claussen, chief investment strategist of OptionsHouse LLC.
Quarterly put options expire at the end of the month rather than midmonth like standard options. About 62,000 third-quarter SPY puts traded at the $90 strike and 31,000 traded at the $95 strike, which roughly correspond to 900 and 950 on the S&P 500.
In that trade, the investor sells twice as many puts at the lower strike to finance buying puts at the higher strike. In effect, the trade breaks even if the S&P 500 falls between 950 and 850, with a "sweet spot" at 900. That level corresponds with the predictions of some of the more bearish market strategists who expect a pullback to where the S&P 500 was before its earnings-season rally, as opposed to the more bullish consensus of strategists expecting the S&P 500 to end the year above 1000. The S&P 500 index closed Tuesday at 989.67.
More put trading that may be tied to macroeconomic worries also took place in shares of children's clothing maker Gymboree, with 25,000 puts trading against 5,000 calls.
The bulk of the action was in September $40 puts, which traded for $2.70 each and break even at $37.30. Gymboree shares closed down 1.4% at $39.82 on apparent anxiety before the retailer's second-quarter earnings report, which is expected after the market close Wednesday.
Sentiment around Gymboree, which sells items like backpacks and lunchboxes as well as clothes, may be suffering from weak expectations for the back-to-school shopping season.
Despite near-term worries reflected by the defensive maneuvers in the options market, the broader market action showed traders were still optimistic about the chances of economic recovery, with the S&P 500 and Dow Jones Industrials retracing some of their losses from Monday and Friday; both indexes finished the session up 1%.
One outsize, long-term options trade Tuesday also likely reflected a strong optimism over an eventual recovery: more than 30,000 $15 call options traded in Wisconsin-based manufacturer Manitowoc, which closed at $6.66 Tuesday. The success of Manitowoc's construction cranes and commercial-kitchen-equipment manufacturing is tied strongly to an increase in capital investment that would come with an economic recovery.
The catch is that the options traded in longest-dated January 2011 contracts, and only break even if Manitowoc shares more than double from their current price over the next 18 months.
"They are going out as far as they possibly can in time," Mr. Claussen said of the traders making the bet on Manitowoc, "which maybe says they think a recovery is coming -- they're just not sure when."
Write to Ed Welsch at ed.welsch@dowjones.com
Printed in The Wall Street Journal, page C5
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