S&P 500 Rips After Fed Decision, Option Traders Close Long Puts

The Federal Open Market Committee (FOMC) just released its December rate decision, leaving rates unchanged but voting for three rate increases in 2022.

What Happened: Option traders had been buying short-dated protection via long puts earlier this week on Monday and Tuesday, which caused two days of losses in the S&P 500 SPY ETF Trust SPY.

See Also: Option Market Buying Bearish Protection Ahead of Big FOMC Decision

Since the FOMC decision, the S&P 500 has been nothing but bullish, jumping over +1.4% post-release and sitting at the intra-day highs as of the writing this article.

Why It Matters: With the FOMC out of the way and short-term concerns removed from the markets, all of those short-dated long puts are now going to be unwound, which has created a tailwind for the S&P 500.

See Also: Introduction to Options Trading Principles

With those long puts being exposed to theta decay and losing value due to the S&P 500 rising post-FOMC decision, that will create a quick unwinding of the short pressure traders sought earlier in the week, thus creating a rise in the markets.

What's Next: Prior to the FOMC decision, there were approximately 6.9 million calls and more than 13.1 million puts in the market, with two out of every three options leading into the session today as puts (bearish). That is a lot of puts to be unwound heading into the Dec. 17 expiry.

The Dec. 15 option activity has also been heavy printing more than 5.5 million options on the day with more than 2.5 million calls and 2.9 million puts (image below).
 

Combining the heavy trading activity (unwinding of long puts) with the large number of options expiring Dec. 17, options traders should expect an expansion of volatility over the coming sessions and a potential Santa Claus rally into the holiday. Such a scenario would target the all-time highs just above $473 and the $475 strikes.

Meanwhile, should the markets pull back, there is strong support around the $459 and $460 strikes which could act as support on dips. 

Image by Gerd Altmann from Pixabay