XLF Retreat Draws Rare Batch of Options Bears

XLF pulled back on Thursday, as speculation swirled around the latest tax reform proposal out of D.C.

Nov 10, 2017 at 10:04 AM
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Bank stocks have been surging since President Donald Trump's unexpected victory during last November's U.S. election. Underscoring this positive momentum is the price action in the Financial Select Sector SPDR Fund (XLF), up 21% year-over-year. On Thursday, the shares pulled back as speculation swirled over Senate Republicans' tax reform plan -- settling down 0.3% at $26.16 -- and prompting one options trader to bet on even bigger losses by tonight's close.

Taking a quick step back, roughly 77,000 XLF put options traded yesterday -- 1.1 times the average daily volume -- compared to 71,000 call options, fewer than what's typically seen exchanged in a session. The weekly 11/10 26-strike put was most active due to a 19,417-contract block that was bought to open for an initial cash outlay of $310,672 (number of contracts * $0.16 premium paid * 100 shares per contract).

This is the most the put buyer stands to lose, should XLF settle north of $26 when the options expire at tonight's close. Profit, meanwhile, will accumulate on a move south of breakeven at $25.84 (strike less premium paid) -- a level not breached on a weekly closing basis since late September.

Thursday's accelerated put volume marks a change of pace in XLF's options pits. Over the past 50 sessions, nearly 981,600 XLF calls have been bought to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), compared to 381,619 puts. The resultant call/put volume ratio of 2.57 ranks higher than 97% of all comparable readings taken in the past year, pointing to an unusual bullish bias relative to bearish in recent months.

Echoing this heavy call-skew is the exchange-traded fund's (ETF) front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.84. What this means is that near-the-money call open interest outweighs put open interest in the November series of options, which expires at next Friday's close.

In fact, the November 27 call is home to XLF's top open interest position, with 335,357 contracts currently outstanding. It's not entirely clear how traders are using these call options, but those buying them expect a breakout above $27 by expiration at next Friday's close. Meanwhile, those selling them are betting on the strike to serve as a ceiling for the fund.

Looking at the charts, the last time XLF traded north of $27 was November 2007. However, the bank fund came within pennies of this level on Nov. 2, when it topped out at a 10-year high of $26.93. Today, the shares have explored both sides of breakeven in early trading, last seen down 0.3% at $26.08.



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