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Morning Update

This morning S&P futures are lower ahead of the market open. Sentiment in the European session as negative after the German IFO business climate index was reported at 101.4, the fift consecutive monthly decline. In particular European basic materials equities are being sold as fears of a Chinese slowdown continue to weigh on the sector. Gold, silver, and crude oil are all lower as well with the US dollar higher.

Friday we saw unusual options activity in XRT and FB. XRT is the SPDR Retail ETF, and one trader is betting it will make a big move before October expiration. 27,975 60 Oct. puts and 27,975 Oct. 68 calls were bought on for a net price of $0.30. With XRT at 64.02 at yesterday’s close, this strangle makes money if the stock moves above 68.30 or below 63.70 at expiration. A strangle is a spread option traders use when they believe a stock is about to make an explosive move but are unsure of the direction. The spread is also used when they believe a stock’s implied volatility is too low and likely to increase. XRT 30-day implied volatility made a new 52-week low on Friday, which could have been the reason this spread was bought.

Another large trade was saw Friday was the sale of 12,500 Oct. 19 FB puts for $0.15. This trade makes money if FB is above 19 at expiration, which is 16% below Friday’s close. Often traders sell a put on stock they would like to own at a level they are willing buyers. If the stock is below the strike their option is exercised and they are put the stock. If the stock rises they get to keep the premium collected for selling the option, which is like being paid to wait for a good entry.

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