Stocks quoted in this article:
The SPDR S&P Bank ETF (NYSEARCA:KBE - 23.38) -- which contains components such as Wells Fargo & Company (NYSE:WFC), U.S. Bancorp (NYSE:USB), and JP Morgan Chase & Co. (NYSE:JPM) -- is the target of a large-scale, bearishly positioned option trade today. Speculators appear to be buying puts and selling calls to create a synthetic short position that simulates being short the shares.
Call volume is currently running more than 250 times the normal (18,000 contracts versus expected volume of 70); put volume, also 18,000, is more than 800 times what's typically expected on an average trading day. All of this volume has traded at two strikes -- the December 23 put and the December 23 call. Both saw blocks of 7,000 contracts trade about an hour after the opening bell, followed by later blocks numbering 11,000.
The trader evidently sold the calls for an average credit of $1.19 and bought the puts at an average price of $0.89, for an average net credit of $0.30 per spread. Implied volatility has popped higher in the puts and edged lower in the calls today, further confirming the theory that this was a synthetic short play.
Breakeven at expiration, then, is $23.30. At or below this level, gains are unlimited down to zero. Above this point, losses are potentially unlimited. The profit/loss diagram is the same as a short stock, with the exception of the net credit to enter the trade.
While the volume is unusual in this ETF today, the sentiment isn't. The security's Schaeffer's put/call open interest ratio (SOIR) of 1.24 suggests that near-term put open interest outweighs call open interest by a nearly five-to-four margin. What's more, this ratio is higher than 92% of the past year's worth of readings, suggesting a near-climax in bearish speculation.
The KBE hit a new annual peak of $24.76 on September 14 but has turned lower in the subsequent sessions, off roughly 5.6% from this high. The shares have also breached their 10-day and 20-day moving averages.
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