Red-Hot Healthcare ETF Attracts Big Money Options Bull

Healthcare stocks are hot after two U.S. senators unveiled a bipartisan deal to allow federal subsidies to health insurers

Oct 17, 2017 at 3:34 PM
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Healthcare stocks are in focus today, after Senators Lamar Alexander and Patty Murray -- a Tennessee Republican and Washington Democrat, respectively -- announced a bill to reinstate federal subsidies to health insurers. Less than one week after issuing an executive order to roll back parts of Obamacare, President Trump called the bipartisan effort a "short-term" deal. Nevertheless, the Health Care Select Sector SPDR Fund (XLV) is trading up 1.5% at $83.31 -- on track to snap its three-session losing streak -- and call volume is soaring, with one trader possibly targeting new highs over the next few weeks.

At last check, 54,367 call options had changed hands on XLV -- 13 times what's typically seen, and more than six times the number of puts on the tape. Most active is the November 84 call, where 47,545 contracts have traded. Trade-Alert highlights an 18,413-contract block that was likely bought to open for about $1.07 million (number of contracts * $0.58 premium paid * 100 shares per contract).

This is the most the speculator stands to lose, should XLV remain below $84 through expiration at the close on Friday, Nov. 17. Profit, meanwhile, will accumulate on a move north of breakeven at $84.58 (strike plus premium paid) -- in uncharted territory. Delta on the call was last seen at 0.42, suggesting a roughly 42% chance the calls will be in the money at expiration.

Today's penchant for long calls runs counter to the recent trend seen in XLV's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the exchange-traded fund's (ETF) 10-day put/call volume ratio of 3.10 ranks in the 80th annual percentile. In other words, puts have been bought to open over calls at a faster-than-usual clip.

Given XLV's long-term trajectory, though, some of this recent put buying may be a result of those long healthcare guarding paper profits against any potential downside. Year-to-date, the fund has surged nearly 21% -- guided higher by its 80-day moving average. Plus, XLV shares topped out at a record high of $83.41 on Sept. 13, and came within three pennies of matching this milestone earlier today.

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