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Option Idea of the Week: SPDR KBW Regional Banking (ETF) (KRE)

Why bulls may want to keep an eye on KRE

by 9/13/2013 11:23 AM
Stocks quoted in this article:

The SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) has displayed some technical prowess in 2013, gaining more than 27% year-to-date to trade at $35.55, and outperforming the broader S&P 500 Index (SPX) by close to 9 percentage points during the same time frame. On the charts, the security's recent pullback was contained by its 80-day moving average, which has served primarily as a floor since last December. Against this backdrop -- and taking into consideration the heavy skepticism levied against the ETF -- now could be an opportune time to bet bullishly on KRE.

Daily Chart of KRE since November 2012 With 80-Day Moving Average

Diving right in, traders have been overwhelmingly pessimistic toward the ETF, according to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, KRE sports a 10-day put/call volume ratio of 27.01, confirming speculators have bought to open 27 puts for every call during the past two weeks. This ratio ranks in the 88th percentile of its annual range, meaning options players have been scooping up puts over calls at a faster-than-usual pace.

As a result, KRE's Schaeffer's put/call open interest ratio (SOIR) checks in at 4.39, with puts more than quadrupling calls among options scheduled to expire within the next three months. In fact, this ratio is just 10 percentage points shy of a 12-month peak, conveying near-term traders have rarely been more put-heavy toward the security during the past year. An unwinding of these positions -- especially at the underfoot September 35 strike, which holds peak front-month put open interest of nearly 11,600 contracts -- could end up serving as a tailwind over the next several days.

Also of note, short interest rose by 2.5% during the most recent reporting period, bringing the number of shares sold short to 26 million. This is equivalent to more than 11 days' worth of pent-up buying demand, at KRE's average pace of trading. This significant amount of available sideline cash is more than enough to trigger a short-squeeze scenario, should the ETF add to its year-to-date advance.

Finally, from a broader perspective, nearly 90% of the 37 banking-sector names we track are trading above their respective 200-day moving averages. Despite this, just 41% of analysts' ratings across the sector are of the "buy" variety. This leaves open the possibility of future bullish capitulation toward the group, which could help push KRE higher.

Options players wanting to roll the dice on another trek higher for SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) may wish to consider buying the security's in-the-money January 2014 31-strike calls, which presently sport an ask price of $4.90.


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