The options markets are busy again today and the bearish traders are out in force. Institutional traders are clearly positioning for potential downside:
XRT – SPDR S&P Retail ETF – A massive chunk of put options purchased in the March contract on the retail exchange-traded fund, which generally mirrors the performance of the S&P Retail Select Industry index, paints a near-term bearish picture. Shares of the XRT are up 0.35% to $35.38, but the significant volume of put options picked up today indicates the price of the underlying could take a big hit in the next couple of months. It appears approximately 116,000 puts were bought for an average premium of $0.125 per contract at the March $28 strike. Such positioning could point to a drastic 21% decline in the value of the underlying stock given the breakeven point on the puts at $27.875. The spike in demand for option contracts on the fund lifted option implied volatility 7% to 23.68% as of 11:30 am (EDT).
XLY – SPDR Consumer Discretionary Select Sector ETF – Shares of the XLY, which is an exchange-traded fund that invests in companies from the automobile, apparel, hotels, leisure, media and retailing industries – to name a few, are trading 0.30% higher at $29.67. The slight increase in the price of the underlying today may be short-lived according to one bearish option trader. It looks like a huge lot of 135,900 put options were purchased at the March $24 strike for an average premium of $0.13 per contract. The enormous bearish play suggests the trader is bracing for a significant pull back in shares by expiration in March. The breakeven point on the puts at $23.87 is 19.5% lower than the current value of XLY shares. Additional pessimism appeared at the higher March $26 strike where 5,000 put options were coveted for an average premium of $0.25 per contract. The leading indications of such purchases suggest near-term gloom and doom is afoot.
XLB – Materials Select Sector SPDR ETF – A measure of the materials economic sector, the XLB exchange-traded fund, hosted bearish options activity in the March contract today despite the 0.35% increase in shares during the session to $32.39. Like the XRT and the XLY described previously, the Materials Select Sector SPDR had a large pessimistic play unfold in the early portion of the trading day. A huge position comprised of 77,230 put options was purchased at the March $26 strike for a premium of $0.23 per contract. The trader coveting the bearish put options is perhaps expecting that shares of the XLB are set to decline more than 20% from the current price to breach the breakeven point at $25.77 in the next two-or-so months to expiration. A significant collapse such as this brings shares back down to levels not seen since the start of May 2009. Option implied volatility is up 3.7% on the fund to 26.68% as of 11:50 am (EDT).
XLF – Financial Select Sector SPDR ETF – A put spread enacted in the near-term February contract on the financials ETF indicates one investor expects financial stocks will continue to suffer through expiration next week. Shares of the XLF are trading down 1.15% to $14.49. Perhaps the trader expects Obama’s call to limit the size and trading activities of banks is likely to continue to weigh down equities in the financial sector. All potential motivations aside, the spread is certainly a bearish signal. The investor purchased 20,000 put options at the February $14 strike for an average premium of $0.28 apiece, spread against the sale of 20,000 puts at the lower February $13 strike for about $0.09 each. The net cost of the transaction amounts to $0.19 per contract, and positions the investor to accrue maximum potential profits – assuming no position is held in the underlying stock – of $0.81 each if shares of the ETF decline to $13.00 by expiration. We note that shares of the XLF have traded above $13.00 since the start of August 2009.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.