Options Traders Bet Big On a SPDR S&P Bank ETF (KBE) Retreat

Despite its stellar post-election performance, put buying has been picking up steam on the SPDR S&P Bank ETF (KBE)

Jan 19, 2017 at 3:20 PM
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It's fairly well-known that bank stocks have put in a strong performance since the early November U.S. presidential election. In fact, the banking sector -- as measured by the Financial Select Sector SPDR ETF (XLF) -- is near the top of our internal Sector Scorecard, with 95% of the stocks we follow under the bank umbrella trading north of their 80-day moving average. This positive price action has been witnessed in the SPDR S&P Bank ETF (KBE), which has surged nearly 22% since its Nov. 8 close at $34.94 to trade at $42.55, and is fresh off a Jan. 3 eight-year high of $44.56. Nevertheless, options traders have been getting antsy, bracing for a longer-term pullback in the bank exchange-traded fund (ETF).

Today, for instance, KBE puts are trading at nearly six times the average intraday pace, with roughly 6,400 contracts on the tape. Per Trade-Alert, this marks the second straight day of elevated activity at the ETF's June 41 put. Specifically, one block of 5,000 June 41 puts was bought to open yesterday for $2.10 apiece, while it looks like a 5,500-contract lot was seemingly purchased to open today for $1.90 each. In other words, these put buyers each paid $1.05 million (number of contracts * premium paid * 100 shares per contract) to bet on a move below $41 by June options expiration.

This penchant for puts is echoed among short-term traders, based on KBE's Schaeffer's put/call open interest ratio (SOIR) of 1.45 -- in the 66th annual percentile -- meaning puts outweigh calls among options expiring in three months or less. This slightly elevated reading is likely due to the large amount of open interest at KBE's March 40 put, where 7,563 contracts currently reside. Trade-Alert indicates the bulk of these options were bought to open in early December, when the shares were hovering near $42.

Now, it's certainly possible some of the activity at these out-of-the-money puts is a result of SPDR S&P Bank ETF (KBE) shareholders -- or those long bank stocks -- using options to hedge against any downside risk. Regardless, now appears to be an opportune time to purchase premium on KBE, as its Schaeffer's Volatility Index (SVI) of 24% ranks in the 22nd annual percentile. Simply stated, low volatility expectations are currently priced into the ETF's near-term options, a potential boon to buyers.

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