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Put volume on the SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB - 25.48) is running seven times heaver than what's typically expected today, with 35,000 contracts changing hands, compared to just over 5,000 calls. A large portion of this put action has occurred at the January 2013 19-strike put, and it doesn't appear to be on the bearish side.
A 10,000-contract block traded near the bid price in mid-morning action, going off for $0.25 per contract. Open interest was just 1,959 coming into the session, suggesting this trade was the work of put sellers. If the ETF stays above the $19 level through January expiration, the put seller keeps the credit collected and the puts expire worthless. If the XHB pulls back, however, the investor has the option of buying XHB shares for an effective price of $18.75 per share (the strike less the initial credit). This is, one should note, a drop of more than 26%.
The XHB has been on quite a ride, up 77% in the past 12 months and trading almost 50% higher in 2012. Additionally, the ETF has outperformed the broader S&P 500 Index (SPX) by roughly 19 percentage points during the past three months. Today's put traders may be looking for a lower buy-in price and are opting to get "paid to wait" for a pullback, or this may be a relatively conservative way of collecting a modest premium on an outperforming security.