A Trading Lesson: Big Money Bets on a Big Move in Financials ETF


When trading, it is always logical to find it fascinating when you see what kind of big trades are being made in the options markets. Some of the most intelligent in the world use options markets as their play area. Generally speaking, you can even assume a lot of research went into these blockbuster type trades.

Moreover, it is also exciting to think about what the goal of a particular block trade is. A trade can be a hedge or a speculative bet. On the other hand, it could be part of a substantially bigger strategy with multiple pieces in various markets and asset classes. Unless you are talking about a covered call, we can just make an informed guess as to what a trade’s purpose is.

Nevertheless, we can regularly gather imperative data around an asset or asset class from associated options action.  For instance, when you see a large straddle option being purchased, it can be a helpful indicator that there will be an increase in volatility or development in the underlying instrument.

A long straddle is an options strategy where the trader purchases a call and put at a similar strike in the same expiration in an underlying asset. By purchasing both the call and put, the trader is not dependent on the asset moving just up or down. The straddle enables the purchaser to make money in either direction as long as it has moved sufficiently far from the strike.

Basically, going long a straddle is a bet on volatility. A buyer does not have to be right about a direction, just that the stock is going to be at a different spot than it is currently. It is typical for straddles to be acquired at the at-the-money value. Professionals will frequently hedge their straddle at a time when it moves using stock. Nevertheless, there is no reason you cannot just trade the straddle and let it ride.

A very much supported trader bought the 28 strikes January 2019 straddle (28 calls in addition to 28 put) in the Financial Sector SPDR ETF (XLF) for $2.51 per straddle with the stock at $27.75. XLF is the most mainstream ETF for exchanging the budgetary division. It covers banks, insurance agencies, venture organizations, and a couple of other related enterprises.

In any case, the straddle was purchased 5,000 times, which costs over $1.2 million dollars. That is no little sum being gambled. Then again, the exchange will produce $500,000 in a benefit for each dollar above or underneath the breakeven focuses.

There is also a lot of economic news and data expected in the coming months. Additionally, there will be a bunch of widely followed FOMC meetings where rate increases could occur. In other words, there are a large number of potential catalysts for an increase in volatility in the financial sector.

In the event that you concur that XLF could be on the move for the remainder of the year, then this is not an awful approach to position yourself. Moreover, $2.51 for a straddle is not an unreasonable price to pay with five months of time left until expiration. Most importantly, you do not need to pick a direction.