Back to Main

Traders flock to ETFs as fear reigns

By: optionMONSTER
Posted: 5/21/2010 8:50:00 AM
Referenced Stocks: EWH;EWY;FAX;FAZ;SDS;SPX;SPY;VIX

As danger looms in the markets, investors are abandoning individual stocks and turning to exchange-traded funds.

Option activity was more than twice the average level in ETFs and indexes yesterday, suggesting that traders are focusing more on the broader market and are paying less attention to individual names. The pattern is often considered a sign of a bear market.

Some 11.8 million contracts traded on ETFs yesterday, and 3 million changed hands in indexes, according to optionMONSTER's tracking systems. Combined they accounted for 51 percent of total activity, compared with about 39 percent in a typical session.

SPY Chart SPDR S&P 500 fund ( SPY ), which tracks the broad market, was the most active product across the board. Its volume was more than twice the average level, and puts accounted for a bearish 67 percent of the trades.

Upside activity was detected in in leveraged inverse funds that move against the market. Calls outnumbered puts by almost 4 to 1 in the Direxion Daily Financial Bear ETF 3X ( FAZ ), which climbs 3 percent for every 1 percent financials drop, and by almost 3 to 1 in the ProShares UltraShort S&P 500 ( SDS ), which moves twice as much as the S&P 500 but in the opposite direction.

The trend of investors relying on indexes and ETFs reflects nervousness because it's often easier to buy protection on an entire portfolio than hedging risk in each individual holding. It also suggests traders may fear a general liquidation, where stocks are sold indiscriminately, if certain keys levels are broken on the S&P 500.

Aside from the S&P 500, the most active index was the VIX, which measures the price of options on the S&P 500 and tends to spike higher when stocks fall. Options volume on the VIX was more than twice the average level, driven by heavy call buying. (See our recent special report about the index's growing popularity as a hedging tool.)

The most negative sentiment appeared in the iShares MSCI Hong Kong Index Fund ( EWH ) and the iShares MSCI South Korea Index Fund ( EWY ), where puts outnumbered calls by 26 to 1 and 14 to 1, respectively.

(Chart courtesy of tradeMONSTER)