Options volume surged in the SPDR KBW Bank (KBE) exchanged traded fund today as an investor positioned for a modest pullback.
(Click to enlarge)
Our Depth Charge tracking system detected the purchase of 10,000 April 25 puts for $0.55 and the sale of 15,000 April 24 puts for $0.20. The trade cost a net debit of $0.25 per put contract purchased.
KBE rose 0.51 percent to $25.50 in morning trading and is up 8 percent in the past month, outpacing both the S&P 500 and the broader SPDR Financial Select Sector fund (XLF).
Today’s so-called ratio spread will profit from a modest decline in the shares. By selling more puts than they bought, the investor lowered their cost basis and achieves greater leverage.
The strategy will earn a maximum profit of 300 percent if KBE closes at $24 on expiration. Because of the extra puts sold short, the gains will erode below that level and turn to losses under $22.
KBE’s largest holdings include Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).
Overall options volume in the fund is 11 times greater than average so far today. Puts outnumber calls by more than 20 to 1.
Disclosure: No positions
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