IB Options Brief: Materials Select Sector SPDR ETF (XLB) & Financial Select Sector SPDR ETF (XLF)

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Options Traders Utilize Materials ETF Puts To Construct Bearish Positions


XLB ñ Materials Select Sector SPDR ETF
Options traders are initiating bearish strategies on the XLB, an exchange-traded fund designed to track the performance of the Materials Select Sector of the S&P 500 Index, with shares of the fund currently trading just 0.05% lower on the day at $38.43 as of 12:25pm. Investors bracing for a pullback in shares of the fund focused their attention on put options expiring in January and February of 2011 right out of the gate this morning.

Plain-vanilla put buying took place at the February 2011 $38 strike where more than 7,600 puts changed hands, versus paltry previously existing open interest of 125 contracts. It looks like the majority of the puts, at least 5,100 of the contracts, were purchased at an average premium of $1.09 apiece this morning. Put buyers are poised to profit should the price of the underlying fund fall 3.95% from the current price of $38.43 to breach the average breakeven point to the downside at $36.91 by expiration in February.

A nearer-term pessimistic player appears to have purchased a 1,000-lot January 2011 $37/$38 strike put spread for a net premium of $0.27 per contract. The investor makes money if XLB shares decline 1.8% to trade below the effective breakeven price of $37.73 by January expiration day. Maximum potential profits of $0.73 per contract are available to the put player should shares of the fund drop 3.7% to trade below $37.00 before the contracts expire next year. The overall reading of options implied volatility on the ETF is higher by 6.4% this afternoon to arrive at 20.86% as of 12:45pm.

 

XLF ñ Financial Select Sector SPDR ETF
The XLF jumped to the top of our ëmost active by options volumeí market scanner within the first 15 minutes of the trading session after 250,000 call options traded in the January 2011 contract. It looks like the investor responsible for the transaction is taking profits off the table by unraveling a bull call spread that was originally purchased back on November 4, 2010. Shares of the XLF, an exchange-traded fund designed to track the performance of the Financial Select Sector of the S&P 500 Index, are currently down 0.30% to stand at $15.93 as of 11:05am in New York.

The options trader originally paid a net $0.52 per contract for the 125,000-lot January 2011 $15/$17 call spread on November 4, 2010, when shares of the fund were trading around $15.07. Today, the investor dismantled the massive bullish spread, selling 125,000 calls at the Jan. 2011 $15 strike at a premium of $1.03 each, and buying the same number of calls at the Jan. 2011 $17 strike for a premium of $0.05 apiece. The options player receives a net $0.98 per contract on the sale, thus exiting the position with net profits of $0.46 per contract after factoring in the premium paid to initiate the transaction back in November.

Booking profits at this stage of the game could be a sign that this investor no longer sees shares rising through $17.00 by January expiration. The trader is perhaps happy to take profits off the table today, rather than holding out hope for greater returns in the new year, as shares of the fund are trading just $0.13 off Tuesdayís 7-month high of $16.06. The unraveling the massive call spread and a sizeable debit put spread initiated on the XLF on Wednesday may be signs that some options market participants expect the financial sector of the economy to encounter some bumps along the road to recovery going forward.


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