Since the election of Donald Trump the stock market has been on a bullish run. One sector that may benefit from the new administration is the industrial sector, whether that is due to an increase in infrastructure spending or through an increase in domestic manufacturing. On Friday, last week there were a couple of bullish option trades that came into the Industrial Selector Sector SPDR Fund (XLI) ETF option market worth taking a look at.
Before discussing these two trades I wanted to point out exactly what exposure XLI give a holder. there’s no better resource than ETF.Com to get a quick overview of what is held by an ETF. The figure below is a list of the top 10 holdings for XLI.
Just over 45% of the fund’s exposure is concentrated in ten stocks and these ten companies are among the most respected names in business. If domestic government spending on infrastructure projects increases as promised an argument may be made that all these companies will benefit.
So on to the trades. They both used the same options, but were executed at slightly different times on Friday. About 11:45 am Chicago time, with XLI at 63.18 there was a seller of 25,000 XLI Feb 17th 63 Puts at 0.86 who also purchased 25,000 XLI Feb 17th 58 Puts for 0.13. The net result was a bull put spread with a credit of 0.73. Less than an hour later XLI was at 63.22 and there was a seller of 5,000 XLI Feb 17th 63 Puts at 0.84 who then purchased 5,000 XLI Feb 17th 58 Puts at 0.10 for a net credit of 0.74. Since there is only a 0.01 difference in the credits I’m only using one payoff diagram to demonstrate the potential outcome at expiration.
I used the mid-point of the XLI prices from when the two trades were executed. There can be two motivations for a bull put spread, especially when the spread represents 3,000,000 shares (assuming the same trader on both pieces) of the underlying. The first may be a belief that the fund will finish over 63.00 on expiration and the net credit will turn into profit. The second may be that the seller of this put spread is willing to be long 3,000,000 shares of XLI at a net cost of 62.27 considering assignment on the short 63 strike put and a credit offsetting the cost of assignment by 0.73. Either way someone has a bullish outlook for the industrial sector.