XLK Options Traders Take Action Ahead of Tech Earnings

The Technology Select Sector SPDR Fund (XLK) has rallied to new highs, and options traders are betting on more upside

Josh Selway
Apr 25, 2017 at 11:40 AM
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Tech stocks have been some of the biggest winners in the latest market surge, evidenced today by the Nasdaq Composite's (COMP) inaugural trek north of 6,000. Meanwhile, the Technology Select Sector SPDR Fund (XLK) was last seen trading up 0.5% at $54.08 -- fresh off a 16-year high of $54.10 -- bringing its one-year advance to 25%. This is good news for recent options traders, who've taken an unusual interest in calls. 

xlk chart

Specifically, XLK call volume yesterday finished at two times what was expected, thanks to one huge trade at the May 53.50 call. It looks like a trader bought to open 10,000 contracts for roughly 80 cents each, meaning he or she wagered $800,000 (premium paid * number of contracts purchased * 100 shares per contract) on the shares extending their run up the charts before options expire on Friday, May 19. 

In today's trading, call volume is surging once again, and the May 53.50 call is leading the way. Exactly 5,000 contracts have traded here today, suggesting yesterday's trader may be closing part of his or her position amid the exchange-traded fund's (ETF) rally. Meanwhile, there could be buy-to-open activity taking place at the weekly 5/5 54-strike call, pointing to bullish expectations ahead of earnings for some tech heavyweights. 

Looking at data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) suggests this interest in long calls is highly unusual for XLK. For instance, the fund has a 50-day put/call volume ratio of 2.96 across these exchanges, which ranks in the 80th annual percentile. Of course, some of this activity is likely due to investors protecting paper profits with put options

Either way, it's a good time to buy Technology Select Sector SPDR Fund (XLK) options. This is according to its Schaeffers' Volatility Index (SVI) of 10%, which ranks in the low 12th percentile of its annual range. In other words, volatility expectations are unusually low for near-term options. 

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