Investors play it safe with puts on major ETFs

CHICAGO (Reuters) - A grim U.S. jobs report on Friday prompted option players to go on the defensive and accumulate puts in many exchange traded funds that track major stock indexes, according to option analysts and traders.

U.S. stocks tumbled after the U.S. Labor Department reported job creation nearly ground to a halt in December and unemployment rose to a two-year high of 5 percent -- heightening fears the economy is heading into a recession.

"The catalyst for the put buying was worries about the U.S. economy stemming from a disappointing jobs report,' said Frederic Ruffy, analyst at Optionetics, an option education firm based in California.

To protect their portfolios from another wave of selling, many investors scooped up puts pegged to the ishares Russell 2000 Index Fund, the Nasdaq 100 Index Tracking Stock or QQQQ and Standard & Poor's Depositary Receipts, more popularly known as the SPDRs.

In this case, these puts allow investors to sell the shares of the underlying ETF at a given price and time. They are often used by participants to hedge their exposure from further share losses in the ETF or to make bearish bets to profit from another possible move lower.

Options in these ETFS, most notably the puts, were the crowd favorites and the busiest option names in volume, data from Trade Alert showed.

"There certainly seemed like there was panic put buying in the iShares Russell 2000 Index as well as the QQQQs," said Jon Najarian, co-founder of Web information site optionmonster.com in Chicago.

"People thought the technology sector was a safe haven and this week it turned into a house of horrors," Najarian said.

Technology shares were the worst performer in a broad-based decline. The Nasdaq Composite Index logged its sixth straight day of declines.

"As for the small-cap sector, investors bought puts because they feared that these stocks would suffer greater losses faster than big-cap stocks," Najarian said.

Shares of smaller companies are generally considered more volatile than larger companies.

"This is due to the fact that their profits tend to fluctuate more in response to changes in the economy -- smaller companies are quicker to increase or cut production on signs of changing economic conditions," Ruffy said.

PUTS FLY

According to market research firm Trade Alert, nearly 1.5 million options traded in the IWM, out of which more than 1 million were puts. More than 1.47 million option contracts changed hands in the QQQQs, which included 820,223 puts. Both funds had option volume two times their normal level.

In the SPY fund, more than 1.3 million contracts crossed the tape, which included 918.227 puts.

In the IWM, a dispirited outlook for the U.S. smallcap equity segment drove put options to trade at the highest level in two months, said Rebecca Engmann Darst, equity analyst at Interactive Brokers Group.

IWM shares fell 2.89 percent to close at $71.93 while QQQQ shares dropped 4.39 percent at $48.40. Shares of the SPY fund dipped 2.45 percent to $141.31.

(Reporting by Doris Frankel; Editing by Diane Craft)