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November 21, 2012  Wed 3:47 AM CT

XOP: SEE CHART GET CHAIN FIND STRATEGIES
The SPDR S&P Oil & Gas Exploration & Production Fund drew an enormous downside trade yesterday.

A trader bought 20,360 March 45 puts for $1.16, according to optionMONSTER's Depth Charge system. The previous open interest was a mere 78 contracts, so this is a new position.

The long puts were not tied to any trading in the underlying shares identified by our systems yesterday. It could be an outright bearish play or a hedge on a long position in the exchange-traded fund or its underlying stocks. (See our Education section)

The trader is positioning for a potential drop below the $45 strike price by expiration in mid-March. The XOP was last below that price in October, when it briefly dipped below $40.  

The fund fell 0.34 percent to $52.65 yesterday after bouncing off support at $50 on Friday and seeing big gains on Monday. Shares have been trending lower since trading just shy of $60 in mid-September.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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