Options Trader Places $1.8M Bearish Bet On XLV

XLV shares have been on fire since late January

Mar 2, 2017 at 2:08 PM
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Health Care Select Sector SPDR Fund (XLV) options are flying off the shelves, as a number of drug stocks are making bold moves. At last check, puts were crossing at quadruple the expected intraday rate. And, according to Trade-Alert, today's biggest options trade was likely of the bearish kind.

Diving right in, Trade-Alert indicates one speculator bought to open a block of 15,094 June 72 puts for a total of nearly $1.8 million ($1.18 premium paid * number of contracts * 100 shares per contract). By purchasing the out-of-the-money puts, the options trader is counting on XLV to breach $72 by June expiration.

Perhaps the speculator is anticipating an unexpected pullback in the exchange-traded fund (ETF), following its meteoric rise. Or perhaps he's a shareholder hedging against the same. In any case, since its close on Jan. 30, XLV has exploded almost 10% higher to trade at $75.83, and is on the doorstep of its July 2015 record high of $77.40.

Whether speculative or protective, the options trade could be a savvy play, considering the shares are in overbought territory, with its 14-day Relative Strength Index (RSI) docked at 81.7. Moreover, XLV is bucking up against the $76 area, home to its annual high from Aug. 1.

Potentially reinforcing resistance at that strike is peak open interest at the March 76 call, totaling 85,525 contracts. Interestingly, Trade-Alert data suggests the bulk of these contracts were purchased to open in mid-February. As front-month expiration approaches, an unwinding of these bullish bets could act as a speed bump.

However, history suggests the Health Care Select Sector SPDR Fund (XLV) could still hurdle the call wall at the 76 strike. Since inception, shares of the ETF have averaged a gain of 1.2% in March.

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