$XLP bulls double their money

Option traders posted substantial gains in the SPDR Consumer Staples Fund today as it rose for the third session in a row.

On May 3, Investitute’s proprietary programs showed that 20,000 $50 calls expiring on June 15 were purchased for $0.55 with shares at $48.85. These were clearly new positions, as open interest in the strike was only 2,452 contracts before the activity appeared.

The investors were likely placing a bet that the sentiment behind dividend-paying-consumer-staple stocks would shift back to a bullish outlook. The month of April saw the yield on the U.S. 10-year Treasury note abruptly rise 25 basis points to a high of 3.035%, which drew many investors away from consumer staples and other equities that had been purchased for the relatively high dividend yields.

Those June $50 calls were bought for as much as $1.35 today, more than double their initial purchase price. The stock rose 5.1% in the same time frame, illustrating the kind of leverage that can be achieved with options.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

The SPDR Consumer Staples Fund was up 0.83% to close at $51.25 today. The yield on the U.S. 10-year closed at 2.957%, while the annual dividend from the XLP closed valued at 2.95% on Friday.