Technology Bear Buys Big Put Butterfly Spread

XLK – Technology SPDR – The wings of a large-volume bearish butterfly spread appeared on the technology ETF in the first hour of the trading session. Shares of the XLK, an exchange-traded fund designed to correspond to the price and yield performance of the Technology Select Sector of the S&P 500 Index – an Index that includes companies from software, telecommunications, semiconductor, IT services, Internet services and other industries, slipped 1.50% lower as of 11:30 a.m. in New York to stand at $23.88. The tech ETF’s shares have performed well in the past couple of months, rallying 17.83% since August 31, when shares touched an intraday low of $20.58, up to yesterday’s new 52-week high of $24.25. The large bearish spread observed today may be the work of a cautiously optimistic investor hedging additional declines in the value of the tech sector fund, but hoping to see the XLK climb higher. Alternatively, the butterfly spread may have been purchased by an outright bearish individual expecting tech stocks, which have been flourishing as of late, to falter ahead of December expiration. The trader responsible for the transaction purchased 20,000 puts at the December $23 strike for a premium of $0.53 each, sold 40,000 puts at the December $22 strike at a premium of $0.29 apiece, and picked up 20,000 puts at the December $21 strike for premium of $0.16 a-pop. Net premium paid to purchase the spread is reduced to just $0.11 per contract. Thus, the investor is prepared to profit if XLK’s shares fall 4.145% from the current price of $23.88 to breach the effective breakeven point at $22.89 by expiration day. Maximum available profits of $0.89 per contract pad the investor’s wallet if shares decline 7.9% to settle at $22.00 at expiration in December. The butterfly spread exposes the trader to maximum potential losses of $0.11 per contract. But, potential losses are apparently worth the risk for this investor because he stands ready to accrue more than 8 times as much, or $0.89 per contract, if the trade comes good by December expiration.

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.

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