The 7-Figure Options Hedge on Consumer Staples Stocks

There was a huge hedge opened on XLP amid the PG proxy battle

by Josh Selway

Published on Oct 10, 2017 at 2:38 PM
Updated on Oct 10, 2017 at 2:55 PM

The Consumer Staples Select Sector SPDR Fund (XLP) sports a year-to-date lead of less than 5%, easily underperforming the broader stock market. Making matters worse, the exchange-traded fund (ETF) has failed to recover since crossing below its 200-day moving average on Sept. 21, with the shares hitting a nearly seven-month low yesterday. 

Today, XLP is up 0.7% at $54.07 despite losses from the fund's top holding, Procter & Gamble stock. This puts the security just above a 50% Fibonacci retracement of its Dec. 1 low and its 2017 peak, and data from Schaeffer's Quantitative Analyst Chris Prybal shows XLP averages an October gain of 2.6% -- its best of any month. Still, one options trader is bracing for more downside from XLP.

consumer staples etf

Jumping right in, on Monday a trader bought to open roughly 100,000 October 53 puts and 100,000 October 52.50 puts. The 53-strike puts were purchased for 13 cents each, while the 52.50-strike puts crossed at 8 cents each, meaning this trader's initial cash outlay was roughly $2.1 million (contracts purchased x premium paid x 100 shares per contract). Per Trade-Alert, this trade -- presumably a hedge on a long position in the ETF -- carries a notional value of roughly $1 billion.

And today, Trade-Alert suggests the same trader could be rolling some of those 52.50 puts up to the 53 put, since 40,000 of each crossed simultaneously this morning. Interestingly, XLP's 30-day implied volatility (IV) skew of 16.4% ranks in only the 13th annual percentile, so short-term puts are much less expensive than normal when compared to calls.

It's also worth noting that the options involved in yesterday's massive put trades don't encompass many earnings releases of the fund's top holdings, such as Coca-Cola (KO), CVS Health (CVS), and Colgate-Palmolive (CL). However, Procter & Gamble (PG) reports earnings the morning of Friday, Oct. 20 -- the same day the contracts expire. The stock has historically performed fine after earnings, though, moving higher in the post-event session in six of the past eight quarters.

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