One of the most interesting “smart money” trades we came across yesterday was with Financial Select Sector SPDR Fund. (NYSE: XLF).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Made $1,625,00 Betting that Financial Select Sector SPDR Fund (NYSE: XLF) will Stay Above $35 For the Next 12 Weeks
On Thursday, September 23, 2021, a pro trader seems to have sold 25,000 of the December 17, 2021, $35 put options on XLF for $0.65 per share. His inflow was $1,625,000.
XLF – Option Trade
XLF will need to stay above $35 in the next 12 weeks so that the trader can buy back the 17-Dec-21 $35.00 put options for next to nothing. And then our “smart money” trader will get to keep the $1,625,000 he had received when selling the 17-Dec-21 $35.00 put options.
On analyzing the chart of XLF, the stock seems to have broken out of a flag pattern (marked in purple color lines) and is currently moving higher after taking support near the breakout level of the flag pattern. This level (around $36.50, marked as a purple color dotted line) would now act as a support area. The stock is also trading above another strong support area (marked as a blue color dotted line), from which the stock had bounced higher multiple times. All this makes it likely our pro trader is bullish on XLF.
XLF – Daily Chart
This lends credence to our conclusion that the pro sold these put options, as opposed to buying them.
If you agree and would like to mimic this trade, here’s how:
Sell to open the December 17, 2021, $35 put options on XLF for $0.65 or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
Happy Trading!
— Trades of The Day Research Team
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