Perhaps it is a result of increased market volatility to start the new year, but some sector exchange traded funds have recently seen options on those ETFs get pricey and some traditionally defensive sector ETFs are home to some of the most expensive options contracts.
The Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities exchange traded fund, has been a steadier play than many other sector ETFs. That much is confirmed by XLU’s gain of 1.2% since the start of the year and that sturdiness has been enough to elevate XLU options into richly valued territory.
Another defensive sector ETF, the Consumer Staples Select SPDR (NYSEArca: XLP), is also home to pricey options. XLP tries to reflect the performance of consumer staples stocks from the S&P 500 that cover food producers, beverage companies, tobacco and personal-goods, along with food and drug retailers.
XLP and XLU “are both trading with some of the richest options premiums relative to the past year even though their raw number for implied volatility – historical volatility is low relative to the other sectors. Additionally, both of those sectors have held up well based on the average rate of change,” according to See It Market.
The Financial Select Sector SPDR (NYSEArca: XLF) is also seeing its options starting to look pricey relative to historical norms.
Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook. With higher interest rates in place, financial services ETFs entered 2016 as potentially important tells regarding what investors should expect from equities this year. The sector is the second-largest weight in the S&P 500 behind technology.
“For traders who are more comfortable with price risk, the Financial ($XLF) sector is trading with both a high raw premium of IV to HV and a high premium in annual terms. The Financial sector has been weaker in price terms and implied volatility seems to be reflecting that risk,” adds See It Market.
Consumer Staples Select SPDR
