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XLF Mega Bear Spreads

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Halfway through the second quarter, the S&P 500 is up 6.5% YTD and continues to blast through new record highs. In contrast to the first quarter when the leadership came from healthcare, utility, and consumer staple names, financials are the top performers since March. SPDR Financial Fund (XLF) is up more than 10% since then. But in the options market, hefty spreads on the financial ETF have been noteworthy and seem to be expressing concerns about a possible pullback in months ahead.

XLF was ticking $0.05 higher to new records of $20 per share Monday when an investor initiated a hefty three-way spread in the options on the fund. In midday action, 96,000 June 18 puts were sold at $0.03, 96,000 August 19 puts bought for $0.35, and 96,000 August 17 puts sold at $0.09. In other words, they sold June 18 puts and bought the August 17 - 19 put spread, paying $0.23 for the three-way.



The same spread traded in XLF Thursday when an investor was selling June 18 puts at $0.05 and buying the August 17 - 19 put spread for $0.32 cents, 73,000X. Open interest numbers indicate rolling activity. That is, the investor was long the June 18 puts (probably as part of a spread) and is liquidating that position because the puts are $2, or 10% out-of-the-money and expiring in less than five weeks.

XLF Daily Contract Volume
Source: Trade Alert


Meanwhile, a new position is being opened in the August 17 - 19 put spread, which is a bearish position that offers a max payout if XLF falls to $17 or less through the expiration. Interestingly, open interest in August 19 puts on XLF is now 305,232 contracts and the largest of any ETF options contract. It is currently the 7th largest among all US listed options contracts. OI in the August 17 strike is a hefty 259,998 and currently in 11th place. Back on May 3rd we outlined a long July 17-19 put spread purchase based on relatively cheap and steep implied volatilities- the trudge higher has taken most of the value out of that trade, but these continued large hedging blocks suggest some institutional players are doing the prudent thing and hedging some of the gains they've been fortunate to see in the first half of the year.

XLF is one of nine Select Sector funds that collectively hold all of the companies from the S&P 500. Shares are at record levels after rallying 22% year-to-date. It's likely that the huge put spreads on the ETF Thursday and Monday are part of hedging strategies against a stock portfolio. Still, the increased interest is noteworthy because it's not likely that somebody would open a position that represents more than $300 million in notional value unless they had real and legitimate concerns that the financials might falter between now and mid-August.

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