XLF – Financial Select Sector SPDR – Shares of the XLF, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index, are down 0.69% at $14.36 just before 3:40 pm (ET). Despite the decline in the price of the underlying fund, one optimistic options investor itching for a sharp rebound by July expiration purchased a plain-vanilla debit call spread. The trader picked up 15,000 calls at the July $16 strike for an average premium of $0.20 apiece, and sold the same number of calls at the higher July $17 strike for $0.04 each. The net cost of the spread amounts to $0.16 per contract. The parameters of the call spread dictate shares of the financials ETF must surge 12.5% over the current price to $16.16 before the trader breaks even on the transaction. The investor loses the full amount of premium paid for the trade if shares of the XLF fail to rally above $16.00 by expiration day. Maximum potential profits of $0.84 per contract accumulate for the call-spreader if the fund’s shares jump 18.4% to exceed $17.00 by expiration day in July.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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