It’s Friday, the final trading day of the week.
Let’s hope today’s action is better than yesterday’s, which saw the S&P 500 and Nasdaq Composite lose 1.21% and 2.15%, respectively. The big winner was oil futures, which saw Brent crude close at $100.69 a barrel, while West Texas Intermediate ended the day at $92.19, the highest level since the U.S. and Iran entered their ceasefire in June.
Can’t Get Enough Options?: Join the list for Barchart’s daily unusual options report, delivered free.
As I write this pre-market, the futures for both the S&P 500 and Nasdaq Composite are up slightly on lower oil prices. This morning, the preliminary U.S. purchasing managers’ surveys for July are out. It will give us a better idea of how the economy is faring in July.
With investors worried about AI spending and lack of return on those investments, next week’s rate decision by the Federal Reserve and earnings from several of the Magnificent Seven, today will probably be relatively tame.
In yesterday’s unusual options activity, only one stock had a Vol/OI (volume-to-open-interest) ratio above 100 -- stocks with 500 or more contracts traded and expiring in seven days or later -- while there were three ETFs with Vol/OI ratios over 100, so for a change of pace, I’ll discuss three unusually active ETFs from yesterday’s action.
Have an excellent weekend.
State Street Consumer Discretionary Select Sector SPDR ETF (XLY)
The State Street Consumer Discretionary Select Sector SPDR ETF (XLY) had a bad day yesterday, losing 4.61% of its value as investors retreated from non-essential consumer discretionary stocks.
The two unusually active options I’ve focused on are below. While the Vol/OI ratios aren’t very high, I follow many of the stocks held by XLY, so I thought I’d include it in my trio of ETFs.
The first thing I do when studying unusual options activity is go to the options flow to get an idea of what kinds of options strategies are playing out. In the case of the put and call, three trades accounted for almost all of the volume yesterday. The trade for the Dec. 18 $105 put was a new position for a multi-leg trade, while the two for the Sept. 18 call were both single legs.
Both of the single-leg trades were either on the ask or close, suggesting bullish trades. Now, I need to find a second trade that matches the put. As you see below, the 16,499 contracts traded for the Dec. 18 $110 put is the same as the $105 put, and the time of the trade is the same, suggesting a Bull Put Spread.
In this example, the investor/trader sells one $110 put for $5.60 in premium and buys one $105 put for $3.75 for a net credit of $1.85.
The strategy expects XLY’s share price to move higher. The maximum loss on this trade is $3.15 [$110 strike price - $105 strike price - $1.85 net credit]. The maximum loss occurs if the share price is lower than $105 at expiration in December. The maximum profit is the net credit of $1.85. It is achieved if the share price at expiration is above $110.
The risk/reward ratio for this trade is 1.70 to 1 with a profit probability of approximately 41%. It’s a relatively low-risk, low-reward bet.
iShares Russell 2000 ETF (IWM)
If you want to bet for or against small caps, the iShares Russell 2000 ETF (IWM) is really the only game in town when it comes to options. Its 30-day average volume is 1.78 million, making it very liquid.
In yesterday’s unusual options activity, the Nov. 20 $350 call stands out with a Vol/OI ratio of 11.81. The volume of 3,011 wasn’t very high. However, below you’ll see a trade for 3,000 at 10:01 a.m. ET for the $350 call; there’s also a 3,000 trade for the Nov. 20 $380 call at precisely the same time.
This is a Bull Call Spread where you expect IWM to move higher by expiration in November. It involves buying one $350 call and selling one $380 call for a net debit of $0.54. That is also your maximum loss. That occurs if IWM is below $350 at expiration. Your maximum profit is $29.46 [$380 strike price - $350 strike price - $0.54 net debit]. That happens if IWM is above $380 at expiration.
This is a low-risk, high-reward, low-probability—likely just a 10% chance of maximum profit—bet. No harm, no foul.
State Street Energy Select Sector SPDR ETF (XLE)
The State Street Energy Select Sector SPDR ETF (XLE) is probably the most interesting of the three ETFs given rising oil prices. Not surprisingly, XLE’s volume yesterday was 206,633, higher than its 30-day average of 143,424. That said, it wasn’t in the top 10 for the past three months.
XLE had three options with Vol/OI ratios above 20 yesterday. The Nov. 20 $65 put is the one I’m focused on. Not necessarily because of the volume, which was only 2.1% of the total, but because there were several matched trades yesterday with a $65 call expiring on the same day. One of them is shown below.
The options strategy in play is a Long Straddle, which involves buying the long $65 call and buying a long $65 put. This trade expects volatility to pick up along with a big price move in either direction. It’s neither bullish nor bearish.
The net debit of $9.25 -- the cost of both options -- is 15.58% of the share price at yesterday’s close. To make money on this strategy, the share price has to be below $55.75 or above $74.25 at expiration. The profit probability is reasonable at 41.3%. Because the expected move is 10.16% up or down, it’s far more likely that the trade is successful on the downside, where breakeven is just 6.1% lower, as opposed to 25.0% higher on the upside.
However, there is one benefit to the upside: the profit is unlimited. For example, let’s say that the war in the Middle East escalates even further; that will send oil prices higher. I don’t know if a barrel would ever hit $200, but if it did, there’s no question XLE would trade higher than $74.25. At $80, your profit would be $5.75; at $90, it would be $15.75, and so on.
Of all three ETFs, I like the long straddle for XLE the best because volatility under the current situation is almost inevitable.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
3 Unusually Active ETF Options Reveal Bullish, Bearish, and Volatility Bets Texas Instruments Generates Strong Free Cash Flow - But TXN Stock Looks Cheap to Value Buyers Oil’s Surge Sparks Unusually Active Options Bets on Petrobras, Nike, Goldman Sachs and Other 120+ DTEs Why Nvidia (NVDA) Stock Faces Sell-the-News Risk Following Its Q2 Earnings Report