S&P 500 ETF draws big bearish play as losses eyed

*S&P 500 ETF draws massive put option plays

*Trade seen as hedge against potential market losses

By Doris Frankel

CHICAGO, July 23 (Reuters) - As U.S. stocks enjoy a big summertime rally, one option investor went on the defensive on fears the Standard & Poor's 500 .SPX benchmark could suffer significant losses between now and December.

Put option volume swelled to about 1.53 million contracts in the SPDR S&P 500 (SPY.P) on Thursday after an institutional player extended a large bearish position in the exchange-traded fund that tracks the performance of the S&P 500 index.

The massive trades involved 720,000 put option contracts, granting investors the right to sell the underlying shares of the ETF at a fixed price within a specified time period.

They were executed on the International Securities Exchange, the largest U.S. equity options market, said Henry Schwartz, president at option analytics firm Trade Alert.

The fund, often called the "Spiders," is a crowd favorite among option traders and is designed to equal roughly one-tenth the actual S&P index.

"This trade is bearish and has a large area under which it would remain profitable to the downside," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group. "This institutional investor is definitely looking for a pullback in the S&P 500 between now and December expiration."

Rather than an outright bearish bet, this appears to be a hedge on a long stock position in the Spiders, Schwartz said.

The trade in the so-called Spiders was probably a calendar roll in which the investor closed out an existing put spread expiring in the August contract and rolled forward that strategy into the December contract.

The original August position involved 120,000 puts bought at the $92 strike and 240,000 puts sold at the $80 strike in what is known as a 1-for-2 ratio put spread.

With the fund's shares trading at $95.92, the institutional client reversed those August put positions in favor of the December contract where he bought 120,000 $95 puts and sold twice as many $82 puts, Schwartz said.

Net debit of the trade combination was 80 cents. The strategy would work best if the fund falls 14.5 percent to $82 by December expiration, based on the entry share price of the trade.

The fund's shares rose 2.4 percent to $97.85 in late afternoon trade. (Reporting by Doris Frankel, Editing by Chizu Nomiyama)