Finance-sector ETF option trade suggests pullback in shares

* December put spread in XLF appears to hedge tail risk

* Large blocks of XLF downside puts traded last week

* Overall option volume in XLF was more than double the norm

By Doris Frankel

July 30 (Reuters) - A sizable bearish option trade in a financial-sector exchange-traded fund indicated concern on Monday that bank stocks could see another round of volatility and a pullback in shares by the end of the year.

One of the top trades in the options market on Monday was a December $11-$13 put spread, and possibly a hedge initiated in the Financial Select Sector SPDR fund ahead of a week full of event risk. The fund's shares fell 3 cents to $14.73.

The XLF, an exchange-traded fund that holds all the financial-related companies from the Standard & Poor's 500 Index., is routinely among the most popular products in U.S. cash markets.

Overall turnover in the XLF was 2.1 times the average daily volume on Monday with 187,000 puts and 43,000 calls traded, Trade Alert data showed.

Traders like options on ETFs because they are liquid, actively traded and offer an efficient way to play market trends and diversify a stock portfolio. They can use options as part of strategies and hedging techniques to protect stock positions.

The bear put spread was initiated in the ETF as investors awaited announcements from central banks later this week on hopes for further action to stimulate economic growth. The Federal Reserve will deliver its policy statement at the end of its two-day Federal Open Market Committee (FOMC) meeting on Wednesday, while the ECB and the Bank of England are set to hold policy meetings on Thursday.

"The FOMC rate announcement might shake things up Wednesday afternoon," said WhatsTrading.com options strategist Frederic Ruffy.

In addition, the week's economic calendar carries a full load of U.S. data, including Friday's payrolls report for July.

The earnings season remains in full swing as well. Results from major financial services companies this week will include Allstate and American International Group

The spread "might be an opening position to hedge the risk of falling financials in the months ahead," Ruffy said.

It was bought for 24.5 cents and traded 68,000 times. While open interest is sufficient to cover in the $13 put strike, Monday's trades represent the largest blocks ever traded in both contracts, according to options analytics firm Trade Alert.

The maximum profit of the spread happens if XLF shares fall to $11 or less over the next 144 days. The risk is limited to the amount paid - or 24.5 cents - if shares hold above the higher strike or 11.7 percent below the current value of the fund, Ruffy said.

Meanwhile, large blocks of downside put options at the October $13 and December $12 strikes were in play last week on the XLF. The put buying was possibily hedging activity as traders appear to be positioning for a decline in the fund during the next few months.