Options Run Hot as Bank Stocks Sink

BAC stock is headed for its worst day since May 2017

by Karee Venema

Published on Dec 4, 2018 at 2:49 PM

Bank stocks are getting blasted today, as the 10-year Treasury yield sinks. At last check, the Financial Select Sector SPDR Fund (XLF) was down 4.5% to trade at $25.99 -- pacing for its biggest one-day loss since Feb. 8. Against this backdrop, put volume is popping, with one trader targeting even bigger short-term losses.

At last check, roughly 120,000 puts were on the tape, 1.6 times the expected intraday amount, and almost quadruple the number of calls exchanged. While traders may be purchasing new positions at the weekly 12/14 26.50-strike put -- XLF's most active option -- data from the International Securities Exchange (ISE) confirms 12,000 weekly 12/14 25-strike puts were bought to open for 14 cents apiece, or $168,000 (number of puts * premium paid * 100 shares per contract). Breakeven for the put buyer at the close next Friday, Dec. 14, is $24.86 (strike less premium paid).

This accelerated put buying is just more of the same, though. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), XLF's 10-day put/call volume ratio of 3.80 ranks in the 92nd annual percentile, meaning puts have been bought to open over calls at a quicker-than-usual clip in recent weeks -- in particular, those weekly 12/14 26.50-strike puts.

Looking at the charts, the $27.50 level emerged as a stiff layer of resistance following an Oct. 10 bear gap, and is currently home to XLF's 30-week moving average. But while the fund is down 6.7% year-to-date, it hasn't closed a week below the $25 mark since mid-September 2017.

xlf etf weekly chart on dec 4

Drilling down on individual XLF components, Bank of America Corp (NYSE:BAC) has plummeted 5.5% to trade at $27.02 -- putting it on track for its biggest daily drop since May 17, 2017 -- amid sector headwinds and a Dec. 5 ex-div date. The shares have now broken through a trendline connecting higher lows since they bottomed at an annual low of $25.88 on Oct. 26, bringing their year-to-date loss to 8.5%.

bac stock daily chart dec 4

Options traders, meanwhile, are showing an affinity for calls, with 417,000 calls and 101,000 puts on the tape so far -- about two times what's typically seen. The weekly 12/7 28-strike call is most active, and its possible speculators are selling to open positions here, betting on the equity to wallow below $28 through this Friday's close.

Call writing is hardly a new strategy in BAC's options pits. The December 29 call is home to peak front-month open interest of 119,751 contracts, and data from the ISE confirms significant sell-to-open activity here in recent weeks.

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