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Morning Update

Yesterday’s sell off in US equities spilled over into the Asian and European sessions, sending the Nikkei down 2.03% and the DAX down 1.92%. There has been lots of attention on protests in Spain recently, which has spooked markets and sent Spanish 10-year bond yields above 6%. Rising bond yields mean that a Spanish bailout from the ESM will be sooner rather than later. Tomorrow Spain will release their new budget which will include austerity measures and reforms. The market’s reaction to this, as seen through the EUR/USD cross, Spanish bond yield and Bunds, will be an important barometer of the market’s expectations for Spain. If the budget induces risk-off selling Spain could be forced to ask for a bailout as soon as this week. If the market seems satisfied with the budget Spain could wait until Oct. 21 regional elections are held to ask for a bailout.

Yesterday AAPL led the market down, closing down 2.5% on the day. As a result implied volatility in October options popped 10.7%. This move caused one trader to trade a spread known as an iron condor. An iron condor used when traders think a stock will remain sideways through expiration and thus want to short volatility. This trader sold the Oct. 660/710 strangle and hedged by buying the 650/720 strangle. This was put on 1,645 times. As long as AAPL, which closed at 673.54, is in the 660-710 range at October expiration this trade will make $0.38, and if AAPL is either below 650 or above 720 then this trade will lose $9.62.

Another large option trade yesterday was on XRT, the SPDR S&P Retail ETF. This ETF is 11% below the 52-week high it made two weeks ago, and one trader is making a bet that it will continue lower. Yesterday the Nov. 63/58 put spread was bought 24,650 times for $1.25. This is a bearish spread that makes money if XRT is below 61.75 at Nov. expiration. If XRT is below 58 at that time the spread will make its maximum profit of $3.75. This trade could be speculation that retail stocks lead the market lower, or could be a hedge against a portfolio of retail stocks.

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