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Big Bearish Hedge in Materials ETF

Observing large blocks of option order flow is one of the better ways to get a feel of what larger investors and traders are expecting in the near term.

But they have to be taken in context.

During yesterday's afternoon trading, a large order crossed the $XLB options board:

So a trader stepped up and bouught a bunch of OTM puts and (most likely) sold the calls to finance the trade. This seems like a fairly aggressive short bet, right?

Not so fast. When we see big trades like this, it often acts as a stock hedge. This is most likely the case-- the trader most likely had on size in XLB and was looking for a relatively cheap way to hedge the position going into Christmas.

What's the Outcome?

If XLB stays under 38, she won't get called away and will be left with a neat little credit to reduce her basis. And if things get ugly in the market really quick, she is able to sleep well at night.

What's so interesting about this trade is the sheer size of the hedge relative to the volume in $XLB. Assuming that the calls covered stock on a 1:1 basis, we would be dealing with 2 MM shares which accounts for a huge percentage of shares traded per day.

It Makes Sense

Given the macro BS that's going on right now, it would make sense for materials names to get hit pretty hard if the euro moves lower. Reduced global demand, stronger dollar, and a leveraged "risk-off" play.

It may be time to go through some materials names with liquid option boards to pick up some hedges-- $FCX and $POT come to mind.

by Steven Place

Steven Place is the founder and head trader at