XLB – Materials Select Sector SPDR ETF – The purchase of a plain-vanilla debit put spread on the XLB, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Materials Select Sector of the S&P 500 Index, indicates one options strategist is bracing for bearish movement in the price of the underlying shares through January 2011 expiration. Shares of the XLB declined 1.70% to $32.31 by 12:35 pm ET. The pessimistic player picked up 10,000 puts at the January 2011 $32 strike for an average premium of $2.35 each, spread against the sale of the same number of puts at the lower January 2011 $28 strike for an average premium of $1.11 apiece. The net cost of establishing the spread amounts to $1.24 per contract. The investor responsible for the transaction may be employing the spread to protect the value of a long position in shares of the fund. If this is the case, downside protection kicks in should the XLB’s shares decline another 4.80% from the current price of $32.21 to breach the effective breakeven point at $30.76 by expiration day next year.
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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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