by David Russell
Energy stocks have gotten knocked down along with the rest of the market in the last week, and investors are positioning for further downside using the XLE exchange-traded fund.
optionMONSTER's Depth Charge tracking program detected two bearish ratio-spread strategies on the Energy Select Sector SPDR, which includes integrated oil companies, independent producers, and oil-field service providers.
In the first, an investor bought 10,000 February 56 puts for $1.18 and sold 20,000 February 53 puts for $0.43. The trade resulted in a net cost of $0.32 per put contract purchased. Then about two hours later, the strategy was repeated on half as many contracts for a net cost of $0.26.
The XLE rose 0.66 percent to $56.67 Monday and is down 4.4 percent in the last five sessions. If it declines another 6.5 percent to close at $53 on expiration, the ratio-spread buyers will pocket $3, more than five times what they paid.
However, because of the greater number of puts sold short, the profits will erode below $53 and turn to losses under $50. The trade may have been implemented by shareholders of energy stocks who are looking to hedge against a move lower.
Other investors wished to protect against a steeper correction, and bought about 4,000 February 50 puts on XLE for $0.21 and $0.22 against open interest of 1,407 contracts.
Puts outnumbered calls by 7 to 1 in the fund Monday, reflecting bearish sentiment in the name.
(Chart courtesy of tradeMONSTER)