Friday, July 2, 2010

Materials Select (XLB) - Three Large Trades With Conviction

XLB is trading 28.03 with IV30™ up 2.3%. The LIVEVOL™ Pro Summary is below.

This ETF primarily consists of companies involved in such industries as chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products.

The ETF has traded over 69,000 options on total daily average option volume of just 18,735. The five lines in play are the Sep 24 puts (sales), Sep 28 puts (purchases), Sep 34 calls (purchases), Aug 28 puts (purchases) and Jul 32 puts (sales). The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that the Aug 28, Sep 24, Sep 28 and Sep 34 options are opening (compare OI to trade size). From what I can tell, the Jul 32 puts are short interest and the trades today were also sales. I've indicated with "+" or "-" next to the lines to show purchases (+) or sales (-).

I see three distinct trades here:
1) 10,000 Sep 24/34 risk reversal (sell puts/buy calls).
The trade was done for a $0.64 credit so it make money as long as XLB stays above $23.36 on Sep expo. It starts to make huge money when the ETF rises above $34.

2) July 32 / Sep 28 put spread (sell July/buy Sep) 15,000/18,000 times
This is done for a credit and is bullish as it sold the deep ITM puts.

3) Buy 10,000 Aug 28 puts for ~$1.51

The first two are long delta, the second is short. All three show some conviction. The ETF averages 13 million shares a day and only 7.5 (ish) million have traded today, so it's hard to tell if these went up with stock throughout the day.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month on the lines that traded (highlighted).

It's interesting to see the trades occurring all over the skew. That's why the skew has remained in good form, there is no reason for kinks to develop.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

We can see the ETF has dropped hard recently (like the rest of the market). Vol has spiked past the realized in lock step with the recent drop. The housing (and commercial) market news has been bad recently and this ETF is sensitive to that.

Of all the trades, I like the risk reversal the best simply b/c it's done for a credit with a wide range of profitability; it allows for both a continued drop and a sharp recovery.

This is trade analysis, not a recommendation.

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