XLF Options Volume Explodes After Yellen

Financial Select Sector SPDR Fund (XLF) options are flying off the shelves amid hawkish Fed talk

Feb 14, 2017 at 1:27 PM
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Financial stocks are higher this afternoon, as traders cheer hawkish commentary from key Fed officials, including Fed Chair Janet Yellen. As such, the Financial Select Sector SPDR Fund (XLF) is flirting with territory not charted since 2008, and options on the exchange-traded fund (ETF) are flying off the shelves as speculators place big short-term bets.

Big Options Spreads on XLF

XLF has seen roughly 151,000 calls and 159,000 puts change hands so far -- two times the average intraday clip. According to Trade-Alert, one trader likely bought to open 40,000 April 23 puts, and reduced the cost of entry -- and profit potential -- by simultaneously selling to open the same amount of April 21 puts. Each bear put spread was established for $0.24, or $960,000 total ($0.24 x 40K contracts x 100 shares per contract).

If the trader is "vanilla," they hope to profit from a decline south of $22.76 (bought strike minus premium paid) for XLF by April options expiration. But considering the ETF has rocketed more than 9% higher in just three months, last seen at $24.24 -- and off a multi-year best of $24.34 -- the speculator may have initiated the spread as a broader hedge.

On the other side of the aisle, it looks like one trader is gambling on even higher highs for XLF by April options expiration -- which encompasses the Fed's highly anticipated March meeting. Specifically, it seems the trader rolled up 20,000 calls from the March 24 strike to the out-of-the-money April 25 strike. XLF hasn't traded atop $25 since late 2007.

$24 a Sticking Point for XLF?

What's more, the ETF is in the midst of congestion in the $24 range, as founder and CEO Bernie Schaeffer noted in a recent Chart of the Week. Not only is the March 24 call home to peak open interest across all options series -- which could translate into a options-related speed bump in the short term -- but consider the following historical price points:

  • $24.74 = 20% below June 2007 all-time high
  • $24.10 = February 2008 high
  • $23.85 = 5 times March 2009 low
  • $23.79 = 50% return from February 2016 low
  • $23.49 = XLF's 2007 close
  • $23.46 = XLF's 50-day moving average

XLF chart financial stocks

Against this backdrop, and with expectations for a March rate hike on the rise and Trump's highly anticipated tax plan on deck, it will be interesting to see how the shares of the Financial Select Sector SPDR Fund (XLF) -- as well as this pair of financial stocks testing their own key levels -- perform in the near term.

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