Big Printin’ Energy Select (XLE) & Utilities Select (XLU)

by Dan July 12, 2016 11:15 am • Commentary

Here is a breakdown of a couple large, apparently directional sector etf trades today in the options market:  

XLE: Crude oil didn’t like the dollar rally that started in mid 2014, and you can map the recent lows in the U.S. Dollar Index (DXY) to the recent highs in Crude:

[caption id="attachment_64934" align="aligncenter" width="600"]Crude vs DXY ytd from Bloomberg Crude vs DXY ytd from Bloomberg[/caption]

There was a large trade in the Energy Select etf (XLE), that suggests that one trader sees the potential for a breakout of the recent consolidation, or is possibly looking to define risk of a short position. Either way, there was a chunky trade in the options market that is worth noting. When XLE was $69 shortly after the open, a trader paid $1.80 for 36,000 of the Jan17 75 calls to open, or about $6.5 million in premium. These calls break-even at $76.80, up about 11% from the trading level, on the chart, an interesting level dating back to late 2014:

[caption id="attachment_64935" align="aligncenter" width="600"]XLE 2yr chart from Bloomberg XLE 2yr chart from Bloomberg[/caption]


XLU:  the Utilities sector is the best performing sector ytd up 23% by a long shot, with the next best Consumer Staples, up 12%.  It looked as if one holder was rolling some near the money protection given the sector’s sensitivity to rates, and the potential for investors to look for laggard sectors to begin to participate in the SPX’s breakout to new highs, possibly at the behest of sectors like Utilities. When the etf was $52, shortly after the open, it appears a trader rolled out and down slightly a defensive view a couple weeks, selling to close 30,000 July 52 puts at 36 cents to close and buying to open 30,000 July 29th weekly 51.50 puts for 53 cents.  This new put position now breaks-even at $50.97, and a look at the one year chart of the XLU shows the clear potential for a pullback to the late June Brexit induced breakout level of $50, with an overshot potential to $48:

[caption id="attachment_64936" align="aligncenter" width="600"]XLU 1yr chart from Bloomberg XLU 1yr chart from Bloomberg[/caption]