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Traders bet on rebound in utilities

David Russell (david.russell@optionmonster.com)

Utilities have been under pressure, but traders are looking for a comeback.

optionMONSTER's Heat Seeker monitoring program detected the purchase of 19,500 October 38 calls for $0.24 in the SPDR Select Sector Utility Fund. An equal number of October 36 puts were sold at the same time for $0.38. Volume was more than 5 times open interest at each strike, indicating that new positions were initiated.

Owning calls locks in the price where shares can be bought, while selling puts generates income in return for insuring other investors against a pullback. Combining the two strategies is similar to owning stock because both halves profit from a move higher. (See our Education section for more on how to trade more effectively with options.)

The XLU rose 0.78 percent to $37.40 yesterday but has lost 10 percent of its value since the beginning of May. Utilities have been the worst-performing sector in the S&P 500 during that time as higher interest rates have reduced the appeal of their cash dividends.

The fund has been attempting to hold support around the same $36 level that was resistance in late 2011 and late 2012. It bounced there in June and is now trying to make a higher low above it, which could make some chart watchers expect a rally in coming months.

Total option volume was almost triple the daily average in XLU yesterday, with the bullish combination trade accounting for most of the activity. There was also upside call buying in FirstEnergy, which provides electricity to customers in Ohio, Pennsylvania, West Virginia, Maryland, New Jersey, and New York. (See our related story )

Disclosure: I am long the XLU.

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