Rate-Hike Expectations Drive Call Buying on Bank Stocks

Financial Select Sector SPDR Fund (XLF) call options are popular today, as banking shares rise

by Josh Selway

Published on Mar 1, 2017 at 3:54 PM

Bank stocks are leading the broad-market charge today, guiding the Dow to new highs, as Wall Street now expects the Fed to raise interest rates at its March meeting. But anyone who's paid close attention to the so-called "Trump rally" knows financial shares have been rising since the election. In fact, the "Banks" sector is now at the top of our internal Sector Scorecard, meaning it has the most bullish setup, from a contrarian perspective.

For example, 89% of the stocks we track under the "Banks" umbrella are trading atop their 80-day moving averages, with an average one-year gain of nearly 54% -- and that was before today's surge, which has the Financial Select Sector SPDR Fund (XLF) trading at eight-year highs, last seen up 3% at $25.29. More gains could be on the way, too, since March is historically XLF's second-best month of the year, with an average gain of 2.9%. 

Meanwhile, in the options pits, call volume is running at twice the normal intraday pace on the exchange-traded fund (ETF). According to Trade-Alert, one trader closed a 50,000-contract block of weekly 3/31 24-strike calls, rolling a risk-reversal into the May series by buying to open 50,000 May 23 puts, and selling to open 50,000 May 27 calls. 

Bank of America Corp (NYSE:BAC) is also soaring higher today, last seen up 4% at $25.59, and earlier touching an eight-year high of $25.61. The shares have now added 50% since the November election, and options traders may be betting on higher highs. Specifically, data from the International Securities Exchange (ISE) confirms heavy buy-to-open activity today at the stock's weekly 3/3 25.50- and 26-strike calls. 

This is nothing new, however, as bullish options traders have been targeting BAC calls in recent weeks. For example, the stock has a 10-day call/put volume ratio of 4.64 at the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks in the 83rd percentile of its annual range. As such, it's safe to assume a number of speculators are enjoying Bank of America Corp's rally today. 

Citigroup Inc (NYSE:C) is also trading at eight-year highs today, up 3.3% at $61.81 after peaking at $61.94, bringing its post-election gain to almost 24%. Call volume is running at nearly twice the expected intraday pace, with heavy action taking place at the April 65 call. However, data suggests some of the positions here may have been sold to open, so some are speculating the stock could stall out near $65 in the weeks ahead. 

During the past two weeks, though, there's been an unusual interest in Citigroup Inc's long calls. Across the ISE, CBOE, and PHLX, the shares have posted a 10-day call/put volume ratio of 2.52, which is higher than 70% of all comparable marks from the past year. 

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