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Large bullish trade seeks bounce in utility fund

David Russell (david.russell@optionmonster.com)

 One big investor is looking for a bullish turn in the utility sector.

optionMONSTER's Heat Seeker monitoring program detected the purchase of about 20,000 September 41 calls in the Utilities Select SPDR fund for $0.71. An equal number of September 39 puts was sold at the same time for $0.46, resulting in a debit of $0.25. Volume was more than 6 times open interest at both strikes, which indicates new positions were initiated.

Calls lock in the price where the trader can buy XLU, while selling puts obligates him or her to get long if the fund declines. Combining the two strategies is highly bullish, controlling the equivalent of 2 million shares for an initial outlay of just $500,000. Using common stock would have cost more than 160 times that amount. (See our Education section for more on the leveraging power of options.) There is also considerable downside risk.

XLU fell 1.26 percent to $40.89 in afternoon trading, and is down 8 percent since the beginning of July. That makes it the worst performing sector fund within the S&P 500 during that time. (See our researchLAB market scanner for more on the relative performance of major indexes.)

Utilities have struggled as investors worry that an improving economy will push up interest rates and reduce their allure as safe-haven assets.

Today's bullish trade occurred with the fund near its lows early in the session, minutes after XLU tested its 200-day moving average for the first time since early February.

Total option volume is 10 times greater than average, according to Heat Seeker.

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