Are Materials Finally Ready to Rally?

Getty Images

Materials have lagged all year, but one option trader is betting that the sector will go from worst to first.

OptionMonster's monitoring programs detected unusual activity in the Materials Select Sector SPDR Fund yesterday, with some 14,000 June 42 calls bought for $0.20 and $0.21. Volume surpassed the strike's previous open interest of 9,730 contracts, indicating that new positions were initiated.

Calls lock in the price where shares can be purchased in the exchange-traded fund, whose big members include Monsanto and DuPont. Because they are relatively inexpensive, the options can generate significant leverage on a small move in the stock. For instance, those June 42s will return more than 800 percent if shares advance just 10 percent in the next 7-1/2 weeks.

XLB rose 0.95 percent to $40.31 yesterday, making it the second strongest of the key sector funds linked to the S&P 500. But it has lagged all the others since the start of January, according to our researchLAB analysis tool.

Investors had turned cautious in March and April, favoring non-cyclical plays such as health care and consumer staples. But researchLAB shows them turning more aggressive in the last two weeks after the S&P 500 bounced back to its 50-day moving average.

Overall option volume in the fund was triple its daily average yesterday, with calls accounting for more than 90 percent of the total.

—By CNBC Contributor David Russell

Additional News: The 10 Most Overbought Stocks

Additional Views: BofA Trading in Two Words: Fast Money

Options Trading School:


David Russell is a reporter and writer for OptionMonster. Russell has no positions in the XLB.