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.
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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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