Massive Options Trade Looks for Bounce in Ailing Sector

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Health-care stocks have been lagging all year, but yesterday an options trader looked for quick a bounce.

Check out the huge call spread in the SPDR Health Care ETF (XLV):

  • 100,000 25-October 91 calls were purchased for $0.42.
  • 100,000 25-October 92 calls were sold for $0.16.

Long calls fix the price where investors can buy a stock. Selling them fixes a price where they must exit, but also generates income. That lowers the overall cost, and creates the potential for significant leverage. (See our Knowledge Center.)

Tuesday’s position, for example, cost a net $0.26. ($0.42 minus $0.16.) It will expand to $1 if the fund is at or above $92 on expiration. That would be a 285 percent gain from the underlier moving less than 5 percent. Interestingly, that $92 level was also the top of its recent range.

SPDR Health Care ETF (XLV) showing $92 level and daily options volumes.
SPDR Health Care ETF (XLV) showing $92 level and daily options volumes.

XLV ended the session down 1.90 percent to $88.12. Health care is the second worst-performing sector in 2019, trailing only energy. Price pressures and risk from next year’s elections are the main culprits.

Still, the spread buyer may see positives in the near term because two of XLV’s three biggest holdings report earnings before expiration: Johnson & Johnson (JNJ) and United Health (UNH).

Overall, the bullish trade was the largest transaction in the entire options market yesterday. It also pushed options volume in XLV to 7 times greater than average, with calls outnumbering puts by 9 to 1.

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