XLP – Consumer Staples Select Sector SPDR – In the first 5 minutes of the trading session one investor enacted a three-legged bearish options combination play on the XLP, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Consumer Staples Select Sector of the S&P 500 Index, to prepare for continued erosion in the price of the underlying shares through September expiration. Shares of the XLP slipped 1.60% lower to trade at $26.80 by 12:10 pm ET. It looks like the options strategist sold call options in order to partially finance a ratio put spread. To establish the pessimistic play, the investor sold 8,900 calls at the September $28 strike at a premium of $0.19 each, purchased 8,900 now in-the-money puts at the September $27 strike for premium of $0.59 apiece, and sold 17,800 puts at the lower September $25 strike for a premium of $0.16 a-pop. The net cost of the transaction is reduced to just $0.08 per contract. The makeup of this trade positions the responsible party to profit should the XLP’s shares trade below the effective breakeven point on the spread at $26.92 through September expiration. Maximum available profits of $1.92 per contract pad the investor’s wallet if shares of the underlying fund decline another 6.7% from the current price to settle at $25.00 at expiration. The sharp increase in demand for XLP option contracts lifted the overall reading of options implied volatility on the fund 10.7% to 15.55% as of 12:20 pm ET.
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