Thursday, February 24, 2011

Trade of the Day: XLE 74/71 1x2 put spread for $0.05

Looking for ways to spend a nickel? With oil a hot topic in the headlines, a trader today appears to have bought a 1X2 put spread in the XLE March 74/71 series for just a 5 cent debit.

The usually quiet put market in XLE saw 7k of the 74 puts trade against 14k of the 71 puts on our old friend PSEX. Kind of interesting, given that the average daily volume in the puts is usually about 29k contracts. Not an amateur trade at all, given the margin requirements of a 1X2 in a spendy underlying. The trade captures about 3 pts of vol edge according the LivevolPro skew chart below, but clearly what the trader is most interested in is a move to $71 even.


At this point, the trade yields the max $2.95 gain per spread, or a little over $2mm for this trader. Here's a look at P&L at expiration from TOS.

Courtesy Think or Swim

It certainly seems possible, for XLE to retrace some of its recent solid gains based on the chart below. I drew in the green lines to show the strike prices of the puts in the trade.


No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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