NetApp Takeover Rumors Stir Options Pot

XLF Financial SPDR

By Chris McKhann, analyst at OptionMonster.

Financial stocks have taken a beating in 2008 with one index down almost 60%, and one option trader is betting on more pain in the first quarter.

The XLF Financial SPDR (XLF Quote) came into 2008 near $30 and dropped to a low of $8.67 last month before rallying. The exchange traded fund sits at $12.31 in afternoon trading, up nearly 1.5% on the day.

The biggest options trade of the day was a put spread on the XLF, according to optionMONSTER's tracking systems. One trader bought 20,000 of the February 12 puts and sold an equal number of the Febuary 10 puts for a net debit of $0.64 on the $2 spread. Selling the 10 put reduces the cost and exposure to time premium.

The spread caps potential upside if the XLF falls below $10, but it need only drop to $11.36 at expiration to produce gains. And if it does go below $10, it will still be roughly a 200% gain on the trade. If the trader had just purchased the 12 put, the XLF would need to drop below $10.93 for profit at expiration and below $9 to produce a similar%age gain.

The implied volatility of the XLF is 66%, well off the high of 130 set on the low of Nov. 21. The 30-day historical volatility is much higher, at 108%. The 10-day historical volatility is more in line at 67.

The spread is a way to limit the cost of what is still historically high implied volatility while looking for the real volatility to keep up (to the downside, in this case).