Traders Doubt Safety of Classic Safe Haven: Options Recap

Scared shocked woman isolated on gray background

So much for utilities being a safe haven.

The SPDR Utility Fund (XLU) has risen about 6 percent in the last month, making it the top-performing major sector. But yesterday, traders braced for a potential selloff:

  • A block of 75,000 September 50 puts in XLU was bought for $0.61.
  • At the same second, a matching block of September 47 puts was sold for $0.21.
  • It was the largest transaction in the entire options market all session.

Volume was below open interest in the 47s, so there are two possible explanations for the activity. The investor might have sold an existing position in the 47s and rolled to the higher strike. In that case, they now has the right to sell XLU for $50 and will profit from a drop in price. (See our Knowledge Center for more on bearish puts.)

Alternately, both legs might have been opened in a new vertical put spread. That trade stands to earn a potential profit of 650 percent from XLU declining to $47. Either way, they paid a net $0.40 and are positioning for downside in the fund. Above $50, the entire position will expire worthless.

They might suspect that today’s non-farm payrolls report from the Labor Department will trigger a selloff. Remember utilities are generally valued as “safe havens” because of their dividends. But a strong monthly jobs report could push interest rates higher, in the process dragging XLU lower in the process.

The fund ended Thursday’s session up 0.50 percent to $52.74. Overall option volume was almost 5 times greater than the last month’s average, with puts outnumbering calls by a bearish 28-to-1 ratio.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.