Behind 2 Big Options Bets on Bank Stocks

The financial sector is bouncing alongside the broader equities market today

Feb 12, 2018 at 2:04 PM
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The U.S. stock market is soaring today -- paring a portion of last week's losses after President Donald Trump unveiled a massive infrastructure plan. The financial sector is seeing some of the biggest gains, as evidenced by the price action in the SPDR S&P Regional Banking ETF (KRE) and the Financial Select Sector SPDR ETF (XLF). Options traders are blasting the exchange-traded funds (ETFs), too, betting on even more volatile moves over the next several months.

KRE Call Options Heat Up

Shares of the SPDR S&P Regional Banking ETF -- whose top holdings include Fifth Third Bancorp (FITB) and BB&T (BBT) -- were last seen trading up 1.4% at $60.91. The fund started the month trading near its Jan. 24 record high of $63.81, before pulling back with the broader equities market. KRE found a foothold atop its 80-day moving average, though, which also provided support back in June and November.

It looks like one options trader is betting on KRE to take an even bigger bounce. Of the more than 26,000 call options on the tape so far, nearly 61% has centered at the June 65 strike -- due to a 16,000-contract block that was likely bought to open for roughly $2.41 million (number of contracts * $1.51 premium paid * 100 shares per contract). Trade-Alert indicates this likely builds on a similar position initiated last Friday, and reflects a bullish outlook for KRE over the next four months.

XLF Options Traders Initiates a Long Straddle

The Financial Select Sector SPDR ETF -- which includes big banks Goldman Sachs (GS) and JPMorgan Chase (JPM) among its top holdings -- is up 18.4% over the past year. More recently, the shares topped out at a post-financial crisis peak of $30.33 on Jan. 29, but retreated back to their 120-day moving average amid the stock market correction. XLF shares have bounced sharply from this trendline today, up 1.8% at $28.16.

In the options pits, Trade-Alert pegs a possible long straddle using XLF's June 28 call and put. If this is the case, the trader paid around $2.19 million (7,700 contracts * $2.85 premium paid per spread * 100 shares per contract), which is also the most they stand to lose if XLF settles near the strike at June options expiration. Profit, on the other hand, will begin to accumulate should XLF topple the upper breakeven rail of $30.85 (strike plus net debit), or breaches the lower breakeven rail of $25.15 (strike less net debit).


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