Rally in Financial Stocks Sparks Accelerated Options Trading

The Financial Select Sector SPDR ET (XLF) is sharply higher, along with components Visa Inc (V) and Bank of America Corp (BAC)

by Alex Eppstein

Published on May 24, 2016 at 12:31 PM

Financial stocks are cruising higher today amid the latest rate-hike signals from the Fed, with the Financial Select Sector SPDR ETF (XLF) advancing 1.4% at $23.55. Among the stocks on the up and up are credit card concern Visa Inc (NYSE:V) and banking giant Bank of America Corp (NYSE:BAC). Below, we'll break down what's been transpiring on the charts and in the options pits for both V and BAC.

As alluded to, financial sector benchmark XLF is sharply higher, reflecting the rally among bank stocks. As such, the exchange-traded fund (ETF) is just a chip-shot away from its year-to-date breakeven mark of $23.83. It's worth noting the shares have not traded north of that level at any point in 2016.

In the options arena, XLF calls are changing hands at double the expected intraday rate. In fact, it looks like traders may be buying to open the September 25 call, anticipating the ETF will topple the quarter-century mark within the next four months. Historically speaking, the shares haven't explored this territory since August.

Today's preference for bullish bets over bearish represents a change of pace, relative to the Financial Select Sector SPDR ETF's recent history. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 4.61 puts for every call over the last two weeks. The corresponding put/call volume ratio ranks in the high 83rd percentile of its annual range.

Transitioning to specific financial stocks, V has gained 2.6% to trade at $79.22 -- putting it within striking distance of its record high from mid-April, at $81.73. What's more, the shares are among the top gainers among all Dow stocks, trailing only Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT).

V calls are now trading at 1.9 times the usual intraday clip, and more than triple the number of puts on the tape. Looking more closely, traders may be buying to open the weekly 5/27 78.50-strike call, which is in the money after V's upward move.

Meanwhile, BAC has tacked on 1.5% at $14.69, and the weekly 5/27 series is extremely popular -- accounting for the top two strikes. Options traders may be purchasing new positions at the out-of-the-money weekly 5/27 15-strike call, expecting additional upside through this Friday's close, when the series expires. On the flip side, it looks like an option bear bought to open a 7,673-contract block of weekly 5/27 14.50-strike puts, anticipating a short-term pullback.

Technically speaking, Bank of America Corp hasn't been nearly as successful on the charts as Visa Inc. Even after accounting for today's gains, BAC is sitting on a 2016 deficit of nearly 13%. If the bank stock fails to reverse this trajectory on a more sustained basis, it could lead to downgrades -- considering 75% of analysts rate the shares a "buy" or better, with not a single "sell" opinion to be found.

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