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Bears Get Their Paws on the XLB?


Higher volatility may hit materials sector.


Editor's Note: This post is by David Russell, of OptionMONSTER.

A large options trader expects higher volatility in the materials sector, and is using a calendar spread to profit from the move.

Yesterday, optionMONSTER's monitoring systems detected the purchase of 4,450 January 24 puts in the Materials SPDR (XLB) for $3.35, matched against the sale of 4,450 September 24 puts for $2.675. The trade resulted in a net debit of $0.675 and volume in both contracts was more than 5 times open interest. The XLB exchange-traded fund closed at $24.27 yesterday.

If volatility spikes higher in the ETF, the investor will profit more on the January puts he or she owns than the money lost from the short position in the September puts. Longer-dated options appreciate more sharply in price on a rise in volatility than shorter ones, because they have more time value before expiration.

Calendar spreads -- which exploit the different rates of time decay in the 2 contracts -- are most successful when the price of the underlying stock remains little changed.

Other investors are more bullish on the sector. In 1 trade, a buyer purchased 3,000 April 25 calls for $0.10 against open interest of 974. The ETF would have to rise at least 3.4% before expiration today to generate a profit.

In another trade, 1,250 May 24 calls were sold, purchased for $1.15, and an equal number of May 24 puts were sold for $1.10, resulting in a net debit of just $0.05. The so-called risk-reversal trade will generate positive return if XLB closes over $24.05 on May 15 and loses money on any lower price.

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.

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No positions in stocks mentioned.

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