Who's buying all those S&P 500 put options?

Traders are paying huge premiums for Standard & Poor's 500 Index options expiring in red September, October and November.

It is not unusual to see traders worry about what might happen to the market in the typically nasty September-October time frame, but this year, they're really getting carried away.

We can see, in mathematical terms, how much they're paying by looking at the implied volatilities of the S&P 500 (SPX 1,102, +0.07, +0.01%) options expiring in various months. These data show up in the prices of the CBOE Volatility Index (VIX 23.50, -0.63, -2.61%) futures.

The premiums on the VIX futures are huge -- some of the highest readings in history. Table 1 shows the term structure, using closing prices of July 20. All seven months are included in Table 1, so that you can see how the term structure is constructed at this time. There is a healthy premium in August options (over 4 points). But the premiums are extremely large for September and October. After that, the remaining months are rather flat -- nearly the same price as October.

So the term structure rises extremely sharply from August through October, and then flattens out. If you consider what is causing this, it is traders paying up for SPX options expiring from September through November (the underlying "entity" for August VIX futures, for example, is the strip of SPX options expiring in September).