XLB, XLI Put Options Active on July 23 (Materials, Industrial ETFs), XLI Trend Watch

XLI Sep $30 Put (Yahoo Finance) Transparency...
Yesterday, after watching $XLI (industrial ETF) complacently trade on an uptrend line that originated at the March 2009 low (see chart), I wanted to see if option traders were buying puts to hedge against a potential breakdown. Interestingly, I saw that 38,160 September $30 out-of-the-money puts traded with 33,722 of open interest. The put contract closed up $0.05 at $0.21. I wasn't sure of the exact nature of the trade. I thought the activity could have been closing out previous open interest, or perhaps it was a large hedge. So I checked out some options blogs to see what was up.

Interactive Brokers wrote about the put activity on Seeking Alpha. They said:
  1. "38,000 put options were purchased at the Sept. $30 strike for a premium of $0.26 each ten seconds prior to the sizable put play in the XLB";
  2. "Growing interest in the Sept. $30 put suggests shares in the fund may suffer a near 15% pullback ahead of expiration."

So if IB is right, an institutional trader dropped about $1 million on a large hedge to protect against a strong sell-off in industrial stocks, or XLI itself, before September 21 expiration. Owning 38,000 puts gives someone "the right, but not the obligation," to sell 3.8 million shares of XLI at $30, but would only be profitable if XLI fell below $29.74 (subtracting the premium paid) or volatility spiked (premiums rose) and the puts were flipped at a profit. XLI is currently trading at $35, so that's around a 15% pullback from here. CNBC's Option Action talked about this put trade as well (video below). And, as IB noted above, there were similar put trades in XLB, the materials ETF. OptionMonster covered the XLB put activity as well. So, down we go? Or does the trend hold?

Related: August Crash Protection in VIX Options (August 50-60 Calls Active This Week). The next FOMC meeting is on July 31-August 1, so we'll see what Bernanke says. Also, keep an eye on China, Greece, Italy, Spain, and U.S. earnings.


Source: FreeStockCharts.com



Anyone know why bonds (mini-bonds) and bond options aren't on all exchanges yet? Or mini-credit default swaps? Isn't credit the most important part of the capital structure? Why prevent it from being an efficient market? There should be hedges available for unsecured bond holders as well (like options for stocks).

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