Financial Select Sector SPDR ETF (XLF) Options Traders Get Defensive Ahead of Jobs Friday, Fed

The Financial Select Sector SPDR ETF (XLF) is seeing an influx of put buying ahead of tomorrow's nonfarm payrolls report

Dec 1, 2016 at 2:47 PM
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Options traders have been targeting bank stocks recently, with financial giants Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) among the stocks seeing the most active option volume over the past 10 trading days. In fact, according to Schaeffer's Senior Quantitative Analyst Rocky White, these three bank stocks have seen roughly 3.5 million calls collectively traded over the last two weeks, compared to 1.5 million puts. Today, options traders have set their sights on the the Financial Select Sector SPDR ETF (XLF), where 298,000 contracts have traded -- 1.4 times the average intraday pace.

Diving deeper, XLF calls have the edge over puts in terms of absolute volume, with 155,708 of the former -- in line with what's typically seen at this point in the day -- versus 141,934 of the latter traded, double the average intraday rate. The weekly 12/2 and 12/9 22.50-strike puts have seen notable action, with a combined 60,638 contracts traded. According to Trade-Alert, the bulk of this activity is of the buy-to-open kind, meaning speculators are expecting the exchange-traded fund (ETF) to breach $22.50 by the respective expirations, at tomorrow's close and next Friday's close.

Considering this put-buying runs counter to the withstanding trend toward calls seen in XLF's options pits -- and given the ETF's impressive run up the charts of late -- this activity could represent more of a defensive play ahead of tomorrow's nonfarm payrolls report, a theory echoed by Trade-Alert. In fact, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 86,794 calls on XLF over the past two weeks, compared to 65,908 puts. And the resultant call/put volume ratio of 1.32 ranks in the elevated 74th annual percentile.

Both the protective put and "vanilla" call strategies carry weight when looking at XLF's technical backdrop. Shares of the ETF have surged nearly 44% since bottoming at an annual low of $15.86 in mid-February. More recently, a post-election breakout in bank stocks sent the Financial Select Sector SPDR ETF (XLF) barreling through historical resistance at the round $20 mark, with the ETF topping out at an eight-year peak of $22.95 earlier before pulling back to its current perch at $22.80. Nevertheless, XLF remains overbought -- with its 14-day Relative Strength Index (RSI) last seen at 79 -- suggesting a near-term breather may be in the cards.

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