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August 7, 2012  Tue 10:14 AM CT

XOP: SEE CHART GET CHAIN FIND STRATEGIES
The SPDR S&P Oil & Gas Exploration & Production Fund is on pace for its highest close since May 3, but a huge put spread tops today's option action in the name.

The XOP is up 2.5 percent to $52.87. Resistance around $52 has been tested four times in the last month as the stock was range-bound between that level and support at $48. Shares were trading at 2012 lows around $45 in late June.

optionMONSTER's Depth Charge system shows that a trader sold 51,767 September 45 puts for $0.51 against open interest of 55,194 contracts. At the same time, the trader bought the same number of September 49 puts for the ask price of $1.16 in volume that was about 10 times the open interest and clearly a new position.

The trader could be a vertical spread if the activity at the lower strike was opening a new position. That would spend $0.65 to potentially make $3.35 if shares are below that $45 price at expiration.

It is also possible that the trader is rolling the lower-strike put position higher as the stock rises, gaining more delta, or price sensitivity. That could be a directly bearish position or a hedge on long shares of the fund. (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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