Financial Select Sector SPDR Options (XLF): Unusual Trading Activity

| May 24, 2012 | 0 Comments

XLF OptionsOptions in the Financial Select Sector SPDR ETF (XLF) are trading enormous volume this morning.  Our tracking system just keeps lighting up with put buyers.

Option traders are concentrating their buying on a specific June strike.

What’s more, since the Volatility Index is down, traders aren’t paying a lot of money for premiums today.

In early trading, XLF is flat at $14.07 a share.

The largest volume is on the XLF June $13 strike put options.  These contracts have already traded an eye-popping 220,000 contracts this morning.  The price paid was an average of $0.13 a share.

Remember, straight put buying is a strategy that’s used without any other options when traders believe a stock is going to see a large decline.

I think this is hedge funds and large institutions hedging against their large bank positions. 

And when you think about it, this makes perfect sense with all the negative news focusing on the banks.

JPMorgan Chase (JPM) and its multi-billion dollar hedging loss, as well as Morgan Stanley (MS) with its botched Facebook (FB) IPO.

In addition, with Europe still very unstable, it’s obvious option traders are positioning themselves for a rocky next few weeks in the banks.

So, why the $13 strike options?

XLF hasn’t been able to trade above $16 a share in over a year.  Now, with a market correction in progress, XLF has dropped from $15.60 to $13.80 in just under two weeks.

And if it breaks below the 200-day moving average at $13.73, XLF could easily plunge right through the $13 level.

Now it’s no secret that option traders are coming in by the busloads.

So there’s no doubt these option traders are negative on the banks. 

Obviously, they don’t think it’s out of the realm of possibility that with another leg down, these options will increase in value.

As we’ve heard many times before, there can’t be a sustained market rally without bank participation.

And it’s clear this trader certainly agrees with this statement.

Personally, I hope he’s wrong.

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.