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Travel insurance on transport fund

David Russell (david.russell@optionmonster.com)

Transports have been going places, but one investor wants some travel insurance.

optionMONSTER's Depth Charge monitoring system detected the purchase of 2,000 June 113 puts in the iShares Dow Jones Transportation Average Fund for $2.15. An equal number of June 108 puts was sold at the same time for $0.82. Volume was more than 5 times the previous open interest at each strike, indicating that new money was put to work.

Known as a bearish put spread , the transaction cost $1.33 and will earn a maximum profit of 276 percent if the fund closes at or below $108 on expiration. (See our Education section for more on how to generate leverage using options.)

The investor probably owns the IYT or some of its key companies, which include railroads Union Pacific and Kansas City Southern, plus shipping names such as FedEx and United Parcel Service. Buying the put spread will protect the trader from a pullback without forcing him or her to exit the position.

The IYT rose 1.6 percent to $114.29 yesterday and has been leading the broader market higher for months. It's up 21 percent since the beginning of the year, outpacing the S&P 500's 14 percent gain. The fund has also broken back into record territory this week following a pullback in March and April.

Total option volume was quadruple the daily average in the IYT yesterday, with puts outnumbering calls by 7 to 1.

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