Large investor pays $31 million for options hedge against US stock market drop

The drop in US stocks on Monday urged one investor to fill up on stock options that would serve as a defense against a possible stronger hit on the US stocks next year.

In early market on Monday, a large investor purchased 16,000 of January put options for the worth of $31 million dollars. The stocks the investor paid for are at the 2,980 level on the S&P 500 Index .SPX.

The position hit 4.6% below the present market level around 3,124 looks to be hedging $4.8 billion in assets, according to Trade Alert president Henry Schwartz.

An index put option allows the seller to set a definite level on which the underlying index will be sold in the future, therefore providing protection against volatility in the market.

US stocks dropped on Monday when President Trump again sanctioned tariffs on metals importing from Argentina and Brazil. Weak factory activity also affected the market, as investors worry about the slow domestic economy caused by the 17-month trade war.

The S&P 500 .SPX was at 3,124.45, 0.53% lower in afternoon trading.

“The trade may be a year-end hedge following last week’s all-time highs above $3154,” said Schwartz.

The CBOE Volatility Index .VIX hiked to a near 6-week high; at 15.27 before sliding to 13.96.