As we approach the turn from 2020 to 2021, option traders are looking to major market index ETFs to hedge. Many look at the new year as an opportunity to set goals for redefining themselves physically, spiritually, financially, etc. A rebirth! However, how many aspects of our current circumstance will be suddenly absolved in 2021?

Past is Prologue

Shakespeare penned the phrase, “what’s past is prologue.” This phrase tells us that our past will shape the present and the future. That sounds like a rebirth. However, that assumption rests on the idea that we learned our lessons and will change course. As history suggests, this isn't likely to happen.

Our reality is one where the political and investor classes hold the cards. The result is, therefore, more of the same inanity. With very little control over our destiny, free markets' intrepid nature is replaced with the trepidation and plotting nature of a mixed economy.

Wow! That’s getting a little heavy, what’s this have to do with hedging? Basically, there should be some concern that the masters of the universe stumble in early 2020. Why not hedge it?

Hedging Option Activity

A portfolio hedge is a trade that reduces the overall directional risk of your current holdings. At TheoTrade, we teach you a number of strategies that can be used to hedge the downside risk of the market. We also help you identify key signals when institutions are hedging their risk and how to use tools to determine your directional risk.

There are many products and strategies that can be used. Some of the most direct are trading options on index ETFs. There were significant hedges made on the SPDR® S&P 500® ETF Trust (NYSEARCA: SPY) and the Invesco QQQ Trust (Nasdaq: QQQ) today.

SPY Option Activity

At the time of this writing, the options for the SPY were trading over 20% above its 5-day average volume. The put-to-call ratio was 1.35 as more puts were being traded than calls. Here are some large bearish trades that stood out.

• 20,655 4 JAN 21 $370 puts BOT in one print @ $1.24 against open interest of 11,289
• 20,655 4 JAN 21 $360 puts sold in one print @ $0.25 against open interest of 66,544
• 28,242 8 JAN 21 $366 puts mostly BOT @ $2.08 to $2.15 against open interest of 2,885

The options traded for the January 4 expiration occurred at the same time and in one print. The trade was either a long put vertical or a long put roll-up. Either way, it is a bearish indication as the traders of these options are looking to hedge or play a down move into the first week of 2021. The 8 JAN 21 trade is a long put trade looking for a potential move below $366 by January 8.

QQQ Option Activity

The option activity on QQQ was about 35% higher than average with most of the activity occurring on the puts. The put-to-call ratio was a lofty 3.34 for today as put option volume was about 55% higher than average. Over 50% of put activity traded between the market. The rest of the volume split evenly between the bid and ask. Here are two large trades that stood out.

• 20,000 8 Jan 21 $306 puts mostly BOT in one print @ $2.15 against open interest of 5,609
• 110,000 16 APR 21 $283 puts BOT in one print @ $8.51 against open interest of 50,649
• 110,000 16 APR 21 $265 puts sold in one print @ $5.45 against open interest of 120,862

The 8 Jan 21 expiration are long puts that were mostly bought in one print of 15,000 contracts. This is indicating a potential downside below $306. The 16 APR 21 expiration saw both contracts traded at the same time in one print. Based on the data, this is a long put vertical or a put roll-up to a higher strike. The higher open interest on the $265 strike suggests that the strike is being raised to $283, which will provide more hedging power.

Conclusion

The size and the coincidence of this activity is interesting as we are about to cross into a new year. This type of activity along with other indicators can help provide a signal to hedge along with the big money in the market. Considering the expiration selection, it’s clear that there is some concern about what will happen once we pass over the turn to 2021.