Skeptical Options Traders Brace for Another Tech Retreat

As the Technology Select Sector SPDR ETF (XLK) flirts with multi-year highs, put trading and short selling have picked up speed on the tech-heavy exchange-traded fund (ETF)

Karee Venema
Dec 21, 2016 at 2:15 PM
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Puts are trading at an accelerated clip on the Technology Select Sector SPDR ETF (XLK) today -- with 18,406 contracts on the tape, or 1.9 times the expected intraday amount. Most active is XLK's January 2017 48-strike put, largely due to a 13,000-contract block that was bought to open for an initial net debit of $494,000 (number of contracts * $0.38 premium paid * 100 shares per contract). According to Trade-Alert, this is possibly a result of a hedging play, as one trader braces for a near-term pullback below $48 for the tech-heavy exchange-traded fund (ETF), whose biggest holdings include Apple Inc. (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB).

However, today's put-skewed session -- fewer than 1,300 XLK calls have traded so far -- mirrors a broader trend. In fact, there are currently 312,634 XLK puts outstanding, in the 90th percentile of its annual range and just off the Dec. 16 52-week peak of 527,493 open puts. As a point of comparison, total call open interest for the ETF stands at a relatively meager 85,182 contracts, and is docked in the low 13th percentile of its 12-month range.

Drilling down, the January 2017 40-, 42-, 43-, and 45-strike puts make up XLK's top four open interest positions, with a collective 201,675 contracts outstanding. As such, the ETF's Schaeffer's put/call open interest ratio (SOIR) is tilted at a top-heavy 5.76. What's more, this ratio ranks just 1 percentage point from a 52-week peak, suggesting short-term speculators have rarely been as put-heavy toward XLK as they are now.

XLK open interest

It's likely that some of the buy-to-open activity at near-term put strikes could be of the protective kind, considering XLK is fresh off a Dec. 15 16-year peak of $49.41, and was last seen at $49.03, up 14.5% on the year. Nevertheless, skepticism toward the shares is on the rise outside of the options pits, as well. Specifically, short interest nearly doubled in the two most recent reporting period. Plus, with 35.95 million XLK shares sold short, these bearish bets are at their loftiest perch since at least early 2002.

And while speculators both in and out of the options pits may be bracing for more Trump-related turbulence for tech stocks, an unwinding of the skepticism amid the sector's strong price action could create additional tailwinds for the Technology Select Sector SPDR ETF (XLK). According to our internal Sector Scorecard -- complied by Schaeffer's Senior Quantitative Analyst Rocky White -- 75% of the 44 stocks that fall under our "Computer" umbrella are trading north of their 80-day moving averages, yet less than half of analyst ratings are a "buy." Plus, it would take roughly four sessions to cover all of the shorted shares on these individual stocks.

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