Options Brief: Technology SPDR (XLK)

XLK – Technology Select Sector SPDR – Shares of the XLK, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Technology Select Sector of the S&P 500 Index, rallied more than 1.05% to $21.38 in the first couple of hours of the trading day. Long-term options activity initiated by one investor this morning suggests greater volatility in the price of the underlying fund through January 2011 expiration. It looks like the trader purchased a straddle to prepare for a significant shift in the XLK’s share price by the start of next year. We note the straddle traded to the middle of the market but was closer to the offer, which means the transaction is more probably a long straddle, but does not rule out the possibility the investor enacted a short straddle. If the trader did sell the straddle he likely expects shares of the ETF to settle at $21.00 by expiration. But, in the long straddle scenario, the investor purchased 4,700 in-the-money calls at the January 2011 strike for a premium of $1.87 each, and picked up 4,700 puts at the same strike price for a premium of $1.87 apiece. Gross premium paid for the straddle amounts to $3.74 per contract. The parameters of this strategy position the investor to make money as long as the price of the underlying fund shifts dramatically by expiration day. Profits start to accumulate if shares rally above the upper breakeven price of $24.74, or if shares decline through the lower breakeven point at $17.26, by January 2011 expiration. However, if the straddle was sold rather than purchased, the investor keeps the gross premium of $3.74 per contract if shares of the XLK settle at $21.00 at expiration next year.

About Andrew Wilkinson 1023 Articles

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.

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