XLK Mega Roll

Volume in the Technology Select SPDR ETF on Wednesday was more than 10x the normal, as a customer rolled a massive protective put spread from December to March expiration. We see this as a positive sign since a hedged position means the trader is unlikely to dump their core position, even if things get rocky.
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As fellow OptionsProfits contributor Fred Ruffy noted in a piece

yesterday

, Select Sector ETFs can be a useful way to establish positions on performance in specific industry groups. His story was well timed, because yesterday afternoon, we saw a whopper of a trade in one of those ETFs, the

Technology Select SPDR ETF

(XLK) - Get Report

. The largest holdings in this ETF are listed

here

, and are led by

Apple

(AAPL) - Get Report

,

Microsoft

(MSFT) - Get Report

,

IBM

(IBM) - Get Report

,

AT&T

(T) - Get Report

, and

Google

(GOOG) - Get Report

. XLK closed Wednesday at $24.31, very close to the 52-week high of $24.36 set Monday.

XLK options are very liquid, with tight penny-increment markets and average daily option volume near 44,000 contracts. Volume on Wednesday was more than 10x the normal as a customer rolled a massive protective put spread from December to March expiration. The original trade was the December 20/23 put spread, bought 100,000x on October 7 for $0.68 when shares were at $23.15. The premium outlay ($6.8 million before commissions) was a trade that had a potential payoff of $23.2 million if XLK were to expire at or below $20.00 on December 18, but XLK continued a steady climb into earnings season, lifting more than $1.00 to yesterday's close.

The roll of this trade involved a closing sale of the original December put spread for $0.31, realizing a net loss of 3.7 million, and the opening of a new put spread with the same strikes in March for a debit of $0.65. The buyer actually increased the position size as well, taking 150,000 spreads in March, making their net premium outlay $6.65 million and leaving them with a position that could pay off $35 millon if XLK declines 17.7%, to $20.00, by March 19.

This spread could be a large downside bet on the sector, or a simple downside hedge to 15 million shares or $365 million worth of XLK. My view is that the trader initiated the original hedge against a long position, which worked out well since XLK had such a good month, and they were willing to spend some of the gains to protect against a pullback. I would take this as a positive sign since a hedged position means the trader is unlikely to dump their core position, even if things get rocky. XLK opened slightly higher today, near $24.38. One way to establish a long view would be a sale of the March 21/22 put spread for $0.18. The downside is $0.82 if XLK sees a sharp selloff, but my expectation is that XLK will continue to churn higher into the holiday season, and we may have a chance to cover (buy to close) the 21s for a few cents late next month.

Trades: Buy to open 10 XLK March 21 puts for $0.40 and sell to open 10 XLK March 22 puts at $0.58.

At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

Henry is the president of Trade Alert LLC, a provider of real-time options analysis tools to leading Wall Street firms. His systems analyze hundreds of thousands of transactions per second to help professionals identify and interpret market activity in real time, supporting informed trading decisions and intelligent idea generation.

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