Bearish Options Player Enacts Massive Ratio Put Spread on Financial Select Sector (XLF)

XLF – Financial Select Sector SPDR – With the deadline to finish financial reform negotiations by today, pessimistic options players are franticly establishing bearish positions 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, with shares of the fund down 1.65% to $14.27 as of 12:15 pm (ET). One big bearish trader initiated a massive ratio put spread utilizing a total of 210,000 put options in the August contract. The investor purchased 70,000 puts at the August $14 strike for a premium of $0.69 apiece, and sold 140,000 puts at the lower August $13 strike for a premium of $0.37 each. The ratio spread yields a net credit of $0.05 per contract to the trader. The put player may be establishing the spread to protect the value of an enormous position in the underlying shares. In this scenario, downside protection kicks in if the XLF’s shares fall 1.9% to trade below $14.00 ahead of August expiration. The parameters of the spread suggest the investor does not expect shares of the financials ETF to trade much below $13.00 because of the risk inherent in holding twice as many short puts. The trader faces losses if shares of the XLF plunge 16.25% from the current price of $14.27 to trade below the effective lower breakeven point at $11.95 by expiration day. Options investors exchanged more than 468,000 contracts on the fund by 12:30 pm (ET) with more than 15 put options changing hands for each single call options in play thus far today.

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.

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

Be the first to comment

Leave a Reply

Your email address will not be published.