Here is some decent size apparently directional options trades in sector etfs that caught my eye in today’s trading:
XLF – rate sensitive stocks are getting nailed today despite the 10 year yield trading at the highest level since late June. WFC’s nearly 4% decline is weighing on the sector etf, as it makes up nearly 8% of the weight. When the etf was $22.95 a trader bought to open 24,000 March 2017 18 puts for 22 cents and bought 27,000 of the June 19 puts for 36 cents. I think it is safe to say with March 18s having only 9 deltas, and June 18s having 11 deltas, this is not exactly a massively convicted bearish bet, could possibly be dollar cheap disaster protection below the 52 week lows:
GDX – With the goldminer etf down 4%, there was a bullish roll out and down worth noting. When the etf was $26.57 a trader sold to close 20,000 Sept 27.50 / 29.50 call spreads at 14 cents and bought to open 20,000 Oct 26.50 / 28.50 call spreads for 75 cents. This trade breaks even at 27.25, it was slightly in the money when it printed, and has a max profit of up to 1.25 between 27.25 and 28.50. Defined risk strategies for those looking to make near term bullish bets make sense when you consider the technical set up. The etf is approaching important technical support at $25, after being rejected at the uptrend last week that had been in place since the multi-year lows made in January:
HYG – when the iShares US High Yield Bond etf was $85.65 there was a good size bearishly leaning ratio put spread bought to open. 25,000 of the March 2017 85 puts were bought to open for $3.40 and 50,000 of the March 2017 81 puts were sold to open at $1.70 each or $3.40 total. There was no premium outlay for the position. Let’s breakdown how this trade makes money on March expiration. Between 85 and 81 the trader can make up to $4 on 20,000 contracts, or $8 million with the max gain at $81. The payout trails off in a symmetric fashion from $81 to $77, with losses suffered below on the excess 25,000 short put contracts one for one.
Although this is bearish it’s only bearish in a range below. Note that this trade structure is long deltas at the onset, meaning that the ratio of short 81 puts is actually a greater delta than that of the long 85 puts. This could be a hedge against a long position in the HYG where the trader wanted to minimize premium outlay, provide protection in a range below, but willing to add deltas on a more serious correction below the protection. One reason for this observation is the technical set up, as the etf is below the uptrend from the February multi-year lows today for the first time after being rejected at technical resistance at $87 last week:
If I were inclined to play for a sharp break back towards support near $82 I would not choose a longer dated ratio put spread to achieve that goal, despite the sharp pick up in implied volatility (the price of options – blue line) vs the retaliative calm of realized volatility, how much the underlying is moving – white line), it’s still way below levels of vol we saw in late 2015 and early 2016. That means there’s not just risk of the extra puts sold adding deltas below, but if volatility continues higher the net short volatility profile of the trade means if the stock goes lower, the short vega (vol) hurts the hedge as well. It’s really threading the needle and make you wonder what they are rooting for: