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October 12, 2012  Fri 9:57 AM CT

XRT: SEE CHART GET CHAIN FIND STRATEGIES
As the SPDR Retail Fund continues to pull back from last month's highs, a huge three-way trade tops today's option activity in the ETF.

The XRT is down fractionally this morning at $62.51. The exchange-traded fund hit an all-time high of $65.47 a month ago but has been holding support at $62 since then.

More than 64,000 XRT options have traded so far, compared to a daily average of 26,000 in the last month. optionMONSTER's systems show that a trader sold 20,000 October 63 puts for the bid price of $0.75 against open interest of more than 25,000. At the same time, he or she bought 20,000 November 62 puts for $1.20 and sold 20,000 November 58 puts for $0.35.

While the latter was done against greater open interest, it appears that the trader is closing a long put position and opening a new put spread in November. The trader spends a net $0.10 to get downside exposure in the XRT to $58. This could be an outright bearish play or a protective hedge on a long stock position. (See our Education section)
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Education & Strategy

Sweet Spot Exceptions

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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