Bearish three-way spread in SPX

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A trader is hoping that a large butterfly will land on profits in the S&P 500 Index options.

The SPX options are usually the second most active options traded, only behind the SPDR S&P 500 Fund (SPY) options in terms of the average volume and total open interest. But notionally more money changes hands in the SPX options, as they are 10 times the size of the SPY contracts.

So it is uncommon to see option volume above open interest, but that is what we get in the Quarterly December puts this morning. A trader sold 7,200 of the 1580 puts for $3.50. Seconds later he or she bought 3,600 each of the 1640 and 1520 puts for $7 and $2 respectively at the same time. The volume at all three strikes was above previous open interest, indicating that this is a new bearish butterfly spread .

The trader paid $2 for the total package, which is the most that can be lost. The maximum gain of $58 would be realized if the SPX is right around 1580 at the end of the year but will profit anywhere between 1638 and 1522. (See our Education section)

The SPX is currently 13 points to 1760. Last week it saw an all-time high of 1775 and was last below 1640 in early September.

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