Tech Sell-Off Fuels Bearish Options Trading on XLK

The Technology Select Sector SPDR Fund (XLK) is set for a second straight weekly drop

Jun 15, 2017 at 2:22 PM
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Last Friday, June 9, the Technology Select Sector SPDR Fund (XLK) notched a record high of $57.62 in intraday trading. However, an afternoon sell-off pressured the tech exchange-traded fund (ETF) into the red, resulting in its worst week of 2017, and sparking a flood of tech-sector buying climaxes. Further, the fund saw its worst week of outflows in 18 months, $560.5 million of which was withdrawn on Friday alone. The shares of XLK are now on pace for their fourth loss in five sessions, and are set for a second straight weekly drop -- something that's happened just one other time since the U.S. presidential election -- but recent options traders aren't mad about it.

XLK was last seen trading at $55.45, a loss of 0.7% on the day, to test its 50-day moving average. The ETF has closed beneath this trendline just once, on April 13, since early December. Further, the $54-$55 area represents a 20% premium to $45 -- home to XLK's 2015 highs, and which stifled the fund's upside momentum until August 2016. Not to mention the 55-strike put is home to peak open interest in the front-month June series of options, with more than 21,500 contracts outstanding, and the July 56 put takes the crown for the soon-to-be front-month series, with more than 11,000 contracts open. These puts could act as an added layer of support for XLK in the short term.

tech etf xlk chart


Total XLK open interest stands at an annual high of nearly 660,000 contracts. However, only about 144,000 of those are on the call side, compared to more than 516,000 puts outstanding -- in the 99th percentile of its annual range.

In fact, options buyers have been picking up XLK puts over calls at a much faster-than-usual clip during the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The Technology Select Sector SPDR Fund sports a 10-day put/call volume ratio of 5.56 on the exchanges, indicating nearly six puts bought to open for every call. What's more, this ratio is higher than 86% of all others from the past year.

The now at-the-money June 55.50 put saw the most additions during this time frame, and data from the major exchanges shows more than 29,000 contracts were bought to open on June 9, the start of the tech sell-off. Digging deeper, Trade-Alert indicates the block crossed the tape just about an hour before the closing bell, for $0.64 an option. In other words, the puts would become profitable if XLK breaches $54.86 (strike less premium paid) by this Friday's close, when June options expire. It just so happens the fund did, in fact, cross this threshold on Monday, June 12, with a low of $54.77, and open interest depleted significantly at this strike by Tuesday's close, suggesting the speculator cashed in.

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