Did the Option Market Just Signal a Market Top?

The S&P 500 is testing new highs almost every day. The largest market cap stock in the index is Apple Inc whose market cap just surpassed the entire Russell 2000 on Tuesday. An ETF that tracks the Russell is the iShares Russell 2000 ETF (NYSEARCA: IWM). As the price of the index has fallen behind that of its larger cap siblings, the option market is heating up. On Wednesday, there were several bearish vertical spreads being placed for December that are pointing to a large move lower by the end of the year.

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  • It was just two days ago that Apple surpassed a major milestone. No, it’s not the $2 trillion market cap level but rather the comparable size of a $2 trillion market cap. Jim Bianco, director of Bianco Research, discussed the size:

    “Present at the event … Apple’s market cap has now surpassed the entire market cap of the Russell 2000. Or, Apple is now larger than an entire asset class, small cap stocks.”

    As the Russell has been lagging the S&P 500 and Apple began to experience some weakness on Wednesday, the bears began to wade into the option market for thee iShares Russell 2000 ETF.

    Yesterday, the put option volume was 57% higher than average at over 315,713 contracts. While the volume is relevant, it was the trades being made that were more instructive. There were several examples of bearish verticals being placed. For example, 9,600 contracts got filled in two prints for a 31 DEC 20 150/134 long put vertical for around $4.20.

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  • Action to Take: These types of trades could a multimillion-dollar speculative position looking for IWM to reach $134 or lower or it may be a hedge. Either way, it’s a bearish-oriented trade that gives some idea of the potential movement and a timeframe. If you’re looking for a similarly speculative position or a portfolio hedge you may consider copying the same trade.

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