Bears turn big profits in $XLV

A bearish trend in the options of the SPDR Health Care Fund has led the downside move in the sector, delivering significant profits to traders on the downside.

On March 20, Investitute’s tracking systems showed that 5,000 18April $91 puts expiring tomorrow were purchased for $0.94, as part of a bearish spread, with shares at $91.75. This was clearly fresh buying, as volume was far above the strike’s previous open interest of 1,740 contracts.

Those puts traded up to $5.30 today, more than 5 times their purchase price. The stock dropped 7.06% in the same time frame, illustrating how quickly options can far outperform moves in their underlying shares on a relative basis.

Long puts lock in the price where a stock can be sold no matter how far it might drop, gaining value in a selloff with the potential for significant leverage. The contracts can be purchased either as an outright bearish bet or a hedge on a long-stock position.

XLV was down 1.87% today to close at $216.84. Investors have been rotating out of health-care and pharmaceutical names in the last month.