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Large players buy protection in sectors

David Russell (david.russell@optionmonster.com)

Stocks are down today, and the big money is getting nervous.

optionMONSTER's Depth Charge monitoring system detected the purchase of more than 180,000 July 19 puts in the Select Sector Financial SPDR fund (XLF). Most of the large blocks priced for $0.31 to $0.38. Volume was below open interest in the fund, which holds big names such as Berkshire Hathaway, JP Morgan, and Wells Fargo.

The buyers may have already sold the puts on a hunch that the XLF would remain above $19 and now they're buying them back in a panic, or they could be initiating new downside positions. Regardless, the trade reflects a belief that more downside could occur in coming weeks.

The XLF is down 1.58 percent to $19.29 in morning trading and has been trending modestly lower since the broader market peaked a month ago. Big investors use puts on the fund to hedge broad sector allocations.

The Materials Select Sector SPDR (XLB) fund saw similar activity. This time almost 130,000 July 34 puts were bought for $0.12 to $0.15 in volume far above the previous open interest of just 25,895 contracts.

The XLB fell 1.71 percent to $39.57, which makes those puts far out of the money. This suggests that they're being used as cheap insurance against a potential market crash.

Total option volume is 11 times greater than average in the XLB and twice normal amounts in the XLF. Puts account for more than four-fifths of activity in both.

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