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Are materials finally ready to rally?

David Russell (david.russell@optionmonster.com)

Materials have lagged all year, but one option trader is betting that the sector will go from worst to first.

optionMONSTER's Heat Seeker program detected unusual activity in the SPDR Materials Select Sector Fund yesterday, with some 14,000 June 42 calls bought for $0.20 and $0.21. Volume surpassed the strike's previous open interest of 9,730 contracts, indicating that new positions were initiated.

Long calls lock in the price where shares can be purchased in the fund, whose big members include Monsanto and DuPont. Because they are relatively inexpensive, the options can generate significant leverage on a small move in the stock. For instance, those June 42s will return more than 800 percent if the fund advances just 10 percent in the next 7-1/2 weeks. (See our Education section)

The XLB rose 0.95 percent to $40.31 yesterday, making it the second strongest of the key sector funds linked to the S&P 500. But it has lagged all the others since the start of January, according to our researchLAB analysis tool.

Investors had turned cautious in March and April, favoring non-cyclical plays such as health care and consumer staples. But researchLAB shows them turning more aggressive in the last two weeks after the S&P 500 bounced back to its 50-day moving average.

Overall option volume in the XLB was triple its daily average yesterday, with calls accounting for more than 90 percent of the total.

(A version of this post appeared on InsideOptions Pro yesterday.)

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