The SPDR S&P 500 ETF Trust SPY closed the month of October up 8.13% off the Sept. 30 closing price but had, so far, entered into a bearish November.
The Vanguard S&P 500 ETF VOO and iShares Core S&P 500 ETF IVV moved in unison with SPY, rising 8.18% and 8.12%, respectively, in October but over the first four days of November retraced about 2.5%.
Bloomberg Senior ETF Analyst Eric Balchunas noted on Twitter the three ETFs were “on top of the flow leaderboard” last month.
Balchunas believed it was a positive sign when the SPY, VOO and IVV, which he dubbed “The Three Amigos,” had the highest level of options flow because “they cover every imaginable investor type.”
“While Nov could be leaner, Oct was very bullish as ETFs overall took in $84b, best month since March bringing YTD to $477b,” the analyst stated.
What Is Options Flow: Generally speaking, options flow is a tool used by some traders and investors to monitor what the “smart money” is betting on. Options flow tracks where large institutional players are putting their money, which can be used to interpret sentiment.
The Problem With Following Flow: While tracking options flow is one useful tool that can help traders possibly predict future price action across indices, the reason for a large amount of flow is rarely clear.
For example, institutional traders often hedge their plays by taking both sides of a trade through different vehicles. A large institutional trader, such as a market maker or commercial bank may purchase short-dated put contracts of a single security and hedge their trade by purchasing long-dated calls in an ETF that holds the same security.
As Balchunas noted, October brought in the largest options flow since March. But, while March was a bullish month overall, the SPY slumped 8.8% in April and had fallen an additional 8.77% since the first trading day in May.
This indicated the high amount of flow in March was most likely due to institutions hedging their bearish bets with bullish calls in ETFs.
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