Materials have quietly climbed this year.
At the same time, the options tied to the sector have gotten cheaper, trading closer to their five-year low than their five-year average.
That combination caught the eye of a well-known CNBC options strategist, who now sees a rare setup forming.
His view is simple. When a sector is rising and the cost to trade it is falling as well, patient investors get a chance that does not appear often.
Here is what he sees and where the trade can go wrong.
Why a top analyst is watching the XLB materials ETF right now
Michael Khouw, chief strategist at OpenInterest.PRO and a familiar face on CNBC, told viewers that the materials sector deserves a fresh look.
His focus is the State Street Materials Select Sector SPDR ETF (XLB), the most widely traded fund that tracks materials stocks in the S&P 500.
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It charges a low 0.08% expense ratio and holds 28 stocks.
XLB has gained close to 17% so far in 2026, beating the S&P 500, CNBC reported.
The fund closed at $53.54 on Aug. 21, StockAnalysis data show, near its 52-week high of $54.14.
A rising fund’s options usually get more expensive. Here, they got cheaper. That difference is what makes the setup stand out.
What’s actually pushing materials stocks higher
Two forces are lifting the sector.
The first is the artificial intelligence buildout. Every new AI data center needs vast amounts of copper, specialty chemicals, and construction materials.
A single one-gigawatt AI data center requires roughly 50,000 tonnes of copper, Yahoo Finance reported, and hyperscalers are building many of them.
The second force is money and policy.
Concerns about government deficits have kept inflation worries alive, and hard assets like copper and gold tend to hold up well when the dollar’s purchasing power is in question.
That backdrop has already helped gold and copper miners.
Freeport-McMoRan (FCX) reported second-quarter 2026 revenue of $7.03 billion, which beat expectations.
Copper hit an all-time high on the COMEX exchange on Aug. 12, Yahoo Finance reported, with inventories falling for over 40 straight days.
Simply put, the same AI and inflation themes driving tech and gold headlines are now driving demand for raw materials.
Why the options market is handing investors a discount
Here is the part Khouw finds unusual. The cost to trade XLB has dropped, even as the fund has climbed.
That cost is measured by implied volatility, a number that tells you how expensive an option contract is. When it falls, options get cheaper to buy.
Right now, one-month implied volatility on XLB sits at barely over 14%, CNBC reported.
How cheap are XLB options vs. history?
Over the past five years, XLB’s implied volatility has looked very different:
- Five-year average: 19.5%
- Five-year high: 47.25%
- Five-year low: 11.8%
At about 14%, options are priced much closer to their five-year floor than to the average.
For investors, cheaper options mean a smaller upfront cost and a smaller amount at risk on a directional bet.
What the trade looks like in plain numbers
Khouw laid out a straightforward example so readers can see the math.
Khouw’s example is the September $52.50 call, which recently cost about $1.00 per contract. That $1.00 is the most a buyer can lose, and it’s less than 2% of the fund’s price.
To break even, XLB just needs to reach $53.50 within four weeks. That’s a move of less than 2%.
Because premiums are so low, Khouw noted that traders do not need complex strategies to offset cost. A simple call does the job.
Khouw also has an idea for investors who expect the sector to drop.
Buy a September $52.50 put instead of a call. It costs about the same and caps your loss at that same small amount. He said it’s a safer bet against the sector than shorting the ETF.
What you give up by owning only one sector
XLB isn’t evenly spread across the sector. A handful of stocks make up a large share of the fund.
Linde (LIN) makes up about 12.94% of the fund, with Newmont (NEM) near 7.13% and Freeport-McMoRan near 5.62%, StockAnalysis shows.
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The top 10 names account for roughly 58% of the fund. So a move in a few big stocks can swing the whole position.
That’s why this trade works best alongside a diversified portfolio, not a replacement for one.
The risk that can wipe out the whole trade
Options carry a hard deadline that stocks do not, and that deadline can erase your money.
Every option loses value as time passes, a process traders call time decay.
If XLB stays flat over the next few weeks, the contract can expire worthless. In that case, a buyer loses 100% of the premium paid on the trade, even if the shares themselves barely move.
3 things to weigh before placing this trade
- You need direction and timing. The fund has to move your way before the option expires, not just eventually.
- Cheap does not mean safe. Low premiums lower the risk, but the entire premium can still go to zero.
- Size it small. Treat it as a limited-risk add-on to a core portfolio, not a central holding.
Where materials go from here
A rising sector with cheap options gives investors a way to participate at limited risk.
The catalysts behind it, AI construction and inflation-driven demand for hard assets, are shaping much of the 2026 market.
Whether XLB pushes past its 52-week high depends on copper and chemical demand staying firm and the AI buildout keeping its pace. Neither is guaranteed, and a stall in data center spending would take pressure off the trade.
The takeaway for readers is simple. The sector is worth a second look, as long as you size the position carefully and know your exit before you get in.
