Can Financials Hold? Huge Options Trade Targets Key Level

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Can Financials Hold? Huge Options Trade Targets Key Level

Financial stocks got hammered yesterday, and someone’s watching a key level.

Check out this giant put spread in the SPDR Financial ETF (XLF), which holds key names like Bank of America (BAC) and JPMorgan Chase (JPM):

  • 72,540 November 26 puts were bought for $0.31.
  • 72,540 November 24 puts were sold for $0.11.
  • Volume was more than 4 times open interest at both strikes, indicating new positions were implemented.

Long puts fix the price where investors can sell a stock, so they can profit to the downside. Selling puts generates income and creates an obligation to buy shares at a certain level.

Combining the two strategies in a spread reduces cost. It also creates the potential for significant leverage if the options trader correctly anticipates where the underlier will be on a certain date.

In this case, they paid a net $0.20 ($0.31 minus $0.11). They’ll start making money below $26. They’ll collect a maximum $2 if XLF is at $24 or lower on expiration. Based on their entry price, that would be a 900 percent increase from the fund dropping less than 15 percent over the next seven weeks. (See our Knowledge Center.)

XLF fell 2.11 percent to $27.41 on Tuesday. It tried to rally early but then the Institute for Supply Management’s manufacturing index fell more than expected. That triggered worries about a recession and a flat yield curve, which hurts bank profits.

SPDR Financial ETF (XLF) chart, highlighting key levels for Tuesday's put spread.
SPDR Financial ETF (XLF) chart, highlighting key levels for Tuesday’s put spread.

Options Can Target Chart Levels

Tuesday’s put trade also targeted the same $26 level where XLF bounced in early June and mid-August. The investor might have purchased the underlier around that area and wants to hedge against a drop below it. Or they may expect more aggressive selling if the price zone is broken.

Either way, it’s an example of how large institutional investors combine options with technical analysis to position for a wide range of outcomes.

Overall options volume in XLF was more than twice the average over the last month, with puts outnumbering calls by a bearish 4-to-1 ratio.

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