Next week large components of the XLB, the Materials Select etf Dow Chemical (DOW) and Dupont (DD) report Q2 results. These two stocks make up 20% of the etf’s weight, which is why decent size put buying in the etf itself caught my eye. Total options volume was 2x the average daily volume, with two large opening put purchases making up most of the volume.
First, shortly before noon in XLB…
when the etf was $48.50 there was a buy of 20,000 of the Aug 5th weekly 48 puts for 41 cents to open. These puts break-even at $47.59, down about 2% from the trading level on the close in two weeks from Friday.
And just after 1pm when the etf was $48.40 there was an opening buy of 10,000 of the Sept 47 puts for 82 cents. These puts break-even at $46.18 on Sept expiration, down about 4.5% from the trading level.
What’s interesting about these two trades is that they both equal the exact same amount in premium, $820,000. Given the purchase of the Aug 5th weeklies, which might target 20% of the etf’s weight reporting, this could be an outright bearish bet, or possibly protection. Short dated implied volatility (the price of options) in the XLB is far cheaper than its components, and could offer a favorable risk reward as opposed to hedging single stocks.[caption id="attachment_65179" align="aligncenter" width="600"] XLB 1yr chart of 30 day at the money implied volatility From Bloomberg[/caption]
While the etf’s inability to make a convincing breakout to new 52 week highs might cause some to take pause, after the 11% rally since the late June lows it is entirely possible that the etf consolidates a bit at the prior highs. Near term $46 seems like very reasonable downside support:[caption id="attachment_65180" align="aligncenter" width="600"] From Bloomberg[/caption]