XLE – Energy Select Sector SPDR – Shares of the XLE, an exchange-traded fund designed to provide investment results that correspond to the price and yield performance of the Energy Select Sector of the S&P 500 Index, fell 1.1% at the start of the trading day to an intraday low of $51.77. The fund’s shares clawed their way back up, however, and currently stand 0.10% higher on the day at $52.39 as of 12:25 pm (ET). One options investor anticipating bearish movement in the price of the underlying fund purchased a plain-vanilla debit put spread in the first hour of the trading day. The pessimistic player picked up 5,000 puts at the July $52 strike for a premium of $1.45 each, and sold the same number of puts at the lower July $48 strike for a premium of $0.48 apiece. The net cost of the spread amounts to $0.97 per contract. Thus, the investor makes money on the transaction if the XLE’s shares decline 2.6% from the current price of $52.39 to breach the effective breakeven point on the downside at $51.03. The trader pockets maximum potential profits of $3.03 per contract if the fund’s shares fall 8.4% to trade at or below $48.00 by July expiration.
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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