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SPDR Financial Fund Volume Spike Explained

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The SPDR Financial Fund (XLF) is one of nine sector funds that collectively hold all of the S&P 500 stocks. As the name suggests, XLF holds all of the financial-related names from the index. Shares have performed well in 2013 and, while down $0.12 to $20.30 Monday morning, are up 16.4% year-to-date. XLF briefly revisited its July 22nd 52-week highs of $20.87 Wednesday afternoon when it rallied to $20.83 on the heels of the Federal Reserve meeting. It has shed 2.5% since that time.

Some players in the options market seem concerned that financials might falter in the months ahead, as XLF saw a surge of put activity on Friday. Nearly 900,000 put options traded on the financial ETF. It was the most put activity in XLF in over a year, 11X the normal put volume, and compared to call volume of just 43,000 contracts.
XLF Daily Contract Volume
Source: Trade Alert

A large chunk of Friday's put activity was due to spread trading. In morning action, an investor sold 96,000 October 17/19 put spreads on XLF and sold 96,000 October 18/20 put spreads, collecting $0.18 net on the two October out-of-the-money spreads. At the same time, the same investor also bought 192,000 December 18/20 put spreads for $0.38. While the spreads in October options were closing, a new position was opened in December.

The huge spreads in XLF Friday probably adjusted a hedging strategy against a portfolio of financial names. With XLF revisiting its 52-week highs on Wednesday, the investor was probably rolling a protective put strategy out to December from October to buy more time. Nevertheless, since the December 18/20 put spread represents a whopping $390 million in notional value, it is unlikely that the position would be initiated unless the investor has very serious concerns about the short-term outlook for the banks, brokers, and other financial components of the XLF.

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