Basically, what I believe they did (assuming the volume was all, or nearly all, new puts entered by the same person/entity, which we can verify when the updated OI comes out, and which makes sense based on the previous anemic volume) was to short X '05 puts at the 55 strike and go long X + Y '05 puts at the 45 strike, getting nearly a $10/contract credit for the difference between the strikes for X puts, and using that credit to pay for Y 45 strike puts.
Under most conditions, the profit/risk potential is basically the same as just straight out buying Y 45 strike puts. However, rather than having to lay money out, they get a credit upon which they likely earn interest. When they close out the trade, assuming they do it all at once, they'll need to pay back the credit (exception below), as the short puts will still be at a 10 point higher strike than the long puts. But hopefully, they'll have a profit on the Y contracts that they funded with the credit.
An interesting twist is rather than closing out the whole position, they could just sell the Y puts and keep the X puts at both stikes, which would create a bull put spread that would profit if the QQQ moves up, with the max profit having them keep the full credit if the QQQ closes at 55 or higher at expiration. Alternatively, they could sell Y plus Z puts, creating a bull put spread (on X-Z contracts) plus having Z puts naked short, in which case they'd profit even more if the QQQ moves up, though they'd also risk more if the QQQ moves down. With so many contracts, they'd have many ways to exit the trade.
Wow, I haven't used algebra in many years, but it seemed to make sense in this example.
Hope that helps clarify things. Bottom line is, to reflect the underlying activity accurately, these puts should not be counted as over 200,000 puts (2X) when calculating the put/call ratio, but rather only the 8,000 or however many (Y) puts that were not netted out short/long in the trade. Netting this out yields an equity put/call ratio under .5 rather than over 1, which makes quite a difference...
Aloha |
