A single trader poured $36 million into a bullish bet on the S&P 500’s December levels, reports an article in Bloomberg. The wager, a purchase of 20,000 calls connected to the S&P 500, expires on December 30th with a strike price of 4,175. With the index leaping 3.1% at the beginning of this month, that wager could play out with a potential 152% return, if the levels hold.
Speculation about who made the bet ran rampant. “It could be a macro/hedge fund running net short and using this as a year-end hedge or…concerned about underperformance if the market bounces ahead,” Alon Rosin of Oppenheimer & Co. told Bloomberg. The same afternoon, a similar transaction took place, for 7,000 calls on the S&P 500 ending the year at 4,150, and had nearly tripled by the end of the day. The latest market rally—more than 10% from its October lows—was presumably a result of Fed Chair Jerome Powell indicating that the central bank would start to ease up on its tightening as early as this month or next. But Steve Allread of Cutter & Co. believes the boost came from bears who are cutting their losses and running before the end of the year, telling Bloomberg that “the bump is probably shorts covering and people being a little too happy about Powell’s comments.”
Fund managers across the board have slashed their exposure to equities as a result of the harsh selloff this year, and many on Wall Street are predicting that the worst isn’t over yet. Still, the most recent rally likely spurred investors to seek out gains using options, and that helped drive the market upward as the dealers facilitating the trades needed to pick up stocks in order to sustain a neutral position. But Chris Murphy of Susquehanna International Group points out that “trades are having more of an impact in general” since volumes are generally lighter given investors’ reluctance to double-down on either direction. As for the $36 million bet, he speculated, “This investor could be under-invested and wants to be be protected against a Santa Claus rally into year end.”