Options Bears Blast Overbought Healthcare ETF

XLV shares hit a record high on Monday

Oct 4, 2018 at 2:41 PM
facebook twitter linkedin

It's been a rocky day for healthcare stocks, as evidenced by the price action in the Health Care Select Sector SPDR ETF (XLV). The exchange-traded fund (ETF) fell into the red at the open, last seen trading down 1.4% at $93.97. XLV options traders have taken note, too, with nearly 31,000 puts on the tape -- five times what's typically seen and volume pacing in the 99th annual percentile.

Most active are the November 88 and 94 puts, and data from the International Securities Exchange (ISE) confirms 7,000 lower-strike options were sold to open for $0.28 each, while the same number of higher-strike ones were bought to open for $1.15 apiece. In other words, it looks like a long put spread was initiated for an initial cash outlay of $609,000 (number of contracts * $0.87 debit paid per pair * 100 shares per contract).

This represents the most the options trader stands to lose, should XLV stay at or above $94 through the close on Friday, Nov. 16 -- when the back-month options expire. Profit, meanwhile, is capped at $5.13 per pair (difference between the two strikes less the net debit), no matter how far south of $88 the shares may fall.

This bearish activity is reflective of 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 fund's 10-day put/call volume ratio of 1.92 ranks in the 73rd annual percentile, meaning puts have been bought to open over calls at a quicker-than-usual clip.

Among front-month options, the October 94 put has seen the biggest increase in open interest over this two-week time frame, and data from Trade-Alert suggests a number of positions were purchased here last Thursday for a volume-weighted average price of $0.60. If this is the case, breakeven for the put buyers at the close on Friday, Oct. 19, is $93.40 (strike less premium paid).

Looking at the charts, this negative price action runs counter to the fund's long-term trajectory. Since skimming the $80 mark in May, the shares have surged nearly 19%, and topped out at a record high of $96.06 on Monday. Plus, XLV is finding a familiar foothold atop its 20-day moving average, while its 14-day Relative Strength Index (RSI) has plunged to 53.9 from 71 at last night's close, with the latter indicating the shares were overbought heading into today's trading.

xlv daily chart oct 4


Now is the time to join our thriving community of Event Traders who consistently profit from every earnings season. With this discounted subscription opportunity, you'll stay ahead of the curve and seize opportunities others miss. Do not let Q3 earnings season pass you by – subscribe now and supercharge your portfolio with expert insights that turn market reactions into profit-generating opportunities!! Don't waste another second... join us right now before the next trade targeting +200% is released!