Bears Feast Ahead of FOMC: Unusual Option Activity Strikes Again

Stocks are sinking today, led lower by the growth-heavy Nasdaq index, which has plunged 

The crypto space is getting burned especially hard. Bitcoin (BTC) traded as low as $22,601.69 today — down by more than -50% YTD. Ethereum (ETH) fared even worse, dropping as low as $1,165 — more than -66% lower YTD.

Crypto-related stocks are fairing even worse. Coinbase (COIN) – Get Coinbase Global Inc Report traded lower by as much as -17% — now more than 84% below its IPO price. Microstrategy (MSTR) – Get MicroStrategy Incorporated Report traded as low as -24% this morning. Riot Blockchain (RIOT) – Get Riot Blockchain Inc Report traded as low as -14%.

But it isn’t just the crypto high-flyers that are down today. The biggest names in mega-cap tech are suffering, too. Amazon (AMZN) – Get Amazon.com Inc. Report traded down by more than -5%. Apple (AAPL) – Get Apple Inc. Report, Microsoft (MSFT) – Get Microsoft Corporation Report and Alphabet (GOOGL) – Get Alphabet Inc. Report all traded lower by more than -2% each. 

Even the energy sector — perhaps the only area of the market still in a bull run — got rocked today, with names like Exxon (XOM) – Get Exxon Mobil Corporation Report, Chevron (CVX) – Get Chevron Corporation Report, and Valero  (VLO) – Get Valero Energy Corporation Report all trading down by more than 3% 

And to make it even worse? The S&P 500 has officially entered bear market territory. But what caused the drop, and why was the “smart money” all over this move to the downside?

Bracing for the FOMC

Today’s market dive follows Friday’s alarming CPI Report which indicated a 40-year inflationary high.

That’s bad news for market participants who believed that the economy had reached “peak inflation”. A soft CPI print could have led the data-dependent Fed (which will conduct another FOMC later this week on June 14th and 15th) to reel in its hawkish forecast for rate hikes.

But data-dependency is a double-edged sword. With a headline-worthy inflation report like the one we saw on Friday, many investors now worry that the Fed will be pressured to put the pedal to the metal and become even more hawkish.

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Economists like CNBC’s Mohamed El-Erian have warned that unless the Fed picks up the pace of rate hikes, it won’t be able to tame spiraling inflation. As a result, firms like Barclays, Jeffries, and Nomura Holdings Inc have adjusted their outlook to expect 75 basis-point hikes in July and September, rather than 50. In short, this means more expensive money and lower profit margins for companies with high amounts of debt.

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Bearish Unusual Option Activity Hits A Home Run

Friday’s session saw a fever pitch in bearish unusual option activity. Market Rebellion Co-Founder Pete Najarian revealed three massive UOA examples on CNBC’s Halftime Report in the form of put buying on the SPDR S&P ETF Trust (SPY) – Get SPDR S&P 500 ETF Trust Report. One trade in particular ($377 strike July puts) cost the buyer a total of nearly $20 million dollars.

The bearish UOA didn’t stop after Pete’s Halftime Report appearance, either. Additional put buying was spotted in the IWM, QQQ, and ARKK ETFs as well as many other names throughout the remainder of the day.

When massive bearish unusual option activity like this strikes over and over again within a short period of time, it indicates that the “smart money” is positioning for a big move to the downside.

And they were dead on.

Those July-expiring SPY $377 put options that Pete referenced on CNBC’s Halftime Report (which were out of the money by $14 at the time), bought for $6.64 per contract, have traded as high as $15.05, and are now at the money. That means the $19.92M that this trader spent on these put options rocketed to as high as $45.15M over a single weekend — not bad for a day’s work.

Slam dunk outcomes like this aren’t a guarantee, but they signify how important it is to keep an eye on the options market for a glimpse into what the “smart money” thinks is about to happen next.

Ready to start trading? Try Unusual Option Activity Essential. Learn how you can follow the “smart money” with a fresh UOA trade idea each week – including technical levels so that you know where to enter and exit!

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