XLF – Financial Select Sector SPDR – Bearish sentiment on 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, appeared in the first 30 minutes of the trading session as one pessimistic options player purchased a put butterfly spread in the July contract. Shares of the fund commenced the session slightly higher than Wednesday’s close, but surrendered the morning’s gains ahead of 11:00 am (ET) to trade flat at $14.82. The bearish investor purchased 20,000 puts at the July $15 strike for a premium of $0.78 apiece [wing 1] and picked up another 20,000 puts at the lower July $13 strike for a premium of $0.24 each [wing 2]. Finally, the body of the butterfly involved the sale of 40,000 puts at the July $14 strike for a premium of $0.43 a-pop. The net cost of enacting the butterfly spread amounts to just $0.16 per contract and represents the maximum loss potential faced by the investor. The spread trader stands ready to accrue maximum potential profits of $0.84 per contract should shares of the underlying fund decline 5.5% from the current price of $14.82 to settle at $14.00 at expiration next month. Shares of the XLF must slip beneath the upper breakeven price of $14.84 before the investor starts to make money. The transaction is a very efficient way for the trader to establish a pessimistic viewpoint on the ETF because the maximum potential loss of $0.16 per contract pales in comparison to maximum potential profits of $0.84 apiece. The reward-to-risk ratio in this case is greater than 5-to-1.
Affiliation: Interactive Brokers
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.
Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.
Visit: Interactive Brokers