The $1.4 Million Options Trade Against Tech

Options traders have targeted OOTM puts on the tech-heavy fund

Sep 1, 2017 at 3:17 PM
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The Technology Select Sector SPDR Fund (XLK) tracks the performance of tech and telecom stocks on the S&P 500 Index (SPX). With big-cap name Apple fresh off an all-time peak earlier -- ahead of a historically bearish month for the FAANG stock -- XLK carved out a record high of its own, hitting $59.03, before easing back to its current perch at $58.79. Nevertheless, put volume has exploded, with one XLK options trader bracing for a sharp pullback over the next several months.

At last check, around 37,500 XLK puts have traded -- four times what's typically seen and volume pacing in the 96th annual percentile. Almost all of the action has centered at the January 2019 50-strike put, due to a 35,750-contract block that was bought to open for $1.43 million (number of contracts * $0.40 premium paid * 100 shares per contract).

This initial net debit is the most the put buyer stands to lose, should the fund hold above the round $50 through January options expiration. Profit, meanwhile, will accumulate on a move below breakeven at $49.60 (strike less premium paid), territory not seen since early February.

In fact, outside of a quick pullback in June that was quickly contained by the tech fund's 80-day moving average, XLK shares have been charting a clean path higher for the past 12 months -- up 25%. As such, it's likely that today's big put buy came at the hands of a tech trader hedging against any unexpected risk over the next five months.

They certainly wouldn't be alone in taking such a defensive stance, either. The September 50, 45, and 55 puts make up XLK's top three open interest positions, with a collective 189,004 contracts currently outstanding -- two-fifths of the fund's total put open interest. Data from Trade-Alert confirms significant buy-to-open activity at each out-of-the-money strike, as well.

And while founder and CEO Bernie Schaeffer recently made the case for tech stocks over small caps, Schaeffer's Senior V.P. of Research Todd Salamone noted in a mid-August edition of Monday Morning Outlook why it's an ideal time to initiate options hedges, explaining "that retreats in volatility will be viewed as a good opportunity to buy protective puts on equity index options and/or cover short volatility positions."

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