Financial stocks jumped yesterday, triggering a big trade in the options market.
The SPDR Financial ETF (XLF) surged 5.2 percent on Tuesday, its biggest rally in more than a month. There was also heavy options volume as 60,000 contracts traded in a single transaction about an hour into the session.
One block of puts expire next Friday, June 5: 20,000 of the 21.50s were sold for $0.13. Volume was below open interest in those, which suggests an existing position was closed.
At the same time, two blocks expiring the following Friday, June 12 also crossed the tape:
- 20,000 12-June 22 puts were bought for $0.36.
- 20,000 12-June 21 puts were sold for $0.16.
- Volume was above open interest in both of these. That indicates new positions were opened.
It looks like the investor came into the session holding the 5-June 21.50 puts as a hedge. Given its size, he or she probably owned at least 2 million shares in XLF. Remember each contract controls 100 shares.
Those puts were set to lose value because the ETF was rallying. So they closed the shorter-term contracts and rolled their protection one week into the future. Making the adjustment cost about $0.07 per share. It also raised their level of protection by $0.50.
The new position is a vertical spread, which sells one contract to buy another. Those reduces cost and creates the potential for greater leverage.
XLF closed at $23.06, bolstered by a surged in major banks like JPMorgan Chase (JPM). The sector fell in February and March after coronavirus shut down businesses, and now it’s viewed as a potential beneficiary of the economy reopening.