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Three-way put spread in oil, gas fund

Chris McKhann (chris.mckhann@optionmonster.com)

Huge put trading dominates unusual option activity in the SPDR Oil & Gas Exploration & Production Fund this morning

More than 75,000 XOP options have changed hands already today, 5 times its daily average over the last month. Only 66 of those contracts are calls, with almost all of the action in a three-way put spread.

optionMONSTER's Depth Charge system detected the sale of 25,000 December 50 puts for the bid price of $0.05 against open interest of almost 85,000. In the following seconds, the trader bought 24,992 March 50 puts for the ask price of $1.60 and sold the same number of March 45 puts for the bid price of $0.60. The volume at the 45 strike was less than open interest.

It appears that the trader is rolling long puts into a vertical spread. He or she is selling to close the soon-to-expire December options and buying the March put spread. The latter cost $1 to open, which is the most that could be lost, while the maximum gain of $4 would be realized if the XOP is below $45 at expiration.

The XOP is trading at $54.15. It is up fractionally this morning and trading in the recent range. Shares bounced off support at $50 a month ago, their lowest level since early August.

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