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This post was written by OptionMonster.com analyst Chris McKhann.
Financial stocks have taken a beating in 2008 with one index down almost 60 percent, and one option trader is betting on more pain in the first quarter.
The XLF Financial SPDR [XLF
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The biggest options trade of the day was a put spread on the XLF, according to OptionMonster's tracking systems. One trader bought 20,000 of the February 12 puts and sold an equal number of the Febuary 10 puts for a net debit of $0.64 on the $2 spread. Selling the 10 put reduces the cost and exposure to time premium.
The spread caps potential upside if the XLF falls below $10, but it need only drop to $11.36 at expiration to produce gains. And if it does go below $10, it will still be roughly a 200 percent gain on the trade. If the trader had just purchased the 12 put, the XLF would need to drop below $10.93 for profit at expiration and below $9 to produce a similar percentage gain.
The implied volatility of the XLF is 66 percent, well off the high of 130 set on the low of Nov. 21. The 30-day historical volatility is much higher, at 108 percent. The 10-day historical volatility is more in line at 67.
The spread is a way to limit the cost of what is still historically high implied volatility while looking for the real volatility to keep up (to the downside, in this case).
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Major Financial ETFs:
Vanguard Financials ETF [VFH
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WisdomTree International Financial Sector Fund [DRF
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iShares S&P Global Financials Sector Index Fund [IXG
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iShares Dow Jones U.S. Financial Sector Index Fund [IYF
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Jon 'DRJ' Najarian is a professional investor, CNBC contributor, and cofounder of OptionMonster.com.
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Data is a real-time snapshot *Data is delayed at least 15 minutes