Breaking Down the Big Bearish Trade on the SPDR S&P Metals and Mining ETF (XME)

One options trader rolled out his bearish position on the SPDR S&P Metals and Mining ETF (XME)

Jan 19, 2017 at 2:08 PM
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The SPDR S&P Metals and Mining ETF (XME) is seeing a major influx of options activity this afternoon, as the exchange-traded fund (ETF) approaches a key technical level. And with the shares pulling back sharply, it's no surprise to see that most of the options action is on the bearish side of the aisle.

Let's start with the charts. XME has dropped 1.7% today at $32.47, pressured by a bearish note on the steel sector at Citigroup. That said, the ETF is still a major long-term outperformer, up 168% year-over-year. Not to mention, the shares appear to have carved out a foothold atop the 61.8% Fibonacci retracement of their 2014 high and 2016 low, which could limit any additional downside:

xme weekly jan 19

Yet, options traders are piling on the bearish bandwagon this afternoon, showing little confidence that technical support will hold. Specifically, puts are changing hands at quadruple the usual intraday rate, and outstrip calls by a roughly 5-to-1 margin. What's more, XME's intraday put/call volume ratio of 4.99 ranks in the lofty 87th annual percentile.

Based on Trade-Alert, the majority of the put activity is the result of one skeptic rolling out his nearly 7,000-contract position at the January 2017 32 strike to the weekly 1/27 32 strike. In other words, the trader is giving XME an additional week to breach the $32 level. This simply echoes the withstanding put-skew among the ETF's short-term strikes. The SPDR S&P Metals and Mining ETF (XME) sports a top-heavy Schaeffer's put/call open interest ratio (SOIR) of 3.40, ranking in the highest one-third of all readings from the past year. Of course, some put traders -- especially those targeting out-of-the-money strikes -- could always be shareholders hedging against a unexpected pullback (like today's).

Taking a step back, our internal Sector Scorecard identifies the non-ferrous metals umbrella as one of the top performers over the past year. Specifically, the average 52-week return on the 16 metal stocks we follow is over 155%, 13 of which are perched atop their 80-day moving average. However, just 30% of analysts have handed out "buy" or better ratings. Not to mention, on average, close to 6% of the typical stock's float is sold short, suggesting potential buying power is still being stashed on the sidelines.

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