After surge in US bank stocks, options traders brace for earnings-fueled volatility
As big banks like JP Morgan, Wells Fargo and Citigroup Inc prepare to kick off earnings season on Friday, the one-month moving average of open put options on the Financial Select Sector SPDR Fund exceeds open calls by a factor. almost 1.9.
It’s the most bearish ratio for the $48 billion financials ETF ahead of quarterly results since banks reported first-quarter 2020 earnings, according to a Reuters analysis of Trade Alert data. Put options are typically used to hedge against price declines, while calls are often used to bet on price gains.
Expectations of higher yields and new loans, along with a shift from growth stocks to economically sensitive and relatively cheap stocks, drove the S&P 500 Financials sector up 5.05% through Monday. , its best start to the year since 2012.
The bearish positioning of options likely reflects investors protecting earnings in the sector. Some of the biggest banking stocks have been notoriously volatile around earnings season, said Ilya Feygin, senior strategist at WallachBeth Capital.
Shares of JPMorgan, for example, fell for five straight quarters on the day of the earnings release. Shares of Citi and Wells Fargo have fallen on earnings day in 6 of the past 8 quarters.
“I really don’t like to go long with this stuff in earnings. It presents a lot of downside spread risk,” Feygin said.
The relative rise in put options follows large inflows into the sector.
The XLF fund attracted $2.15 billion in December, its best month since May, helping lift 2021 net inflows to a record $9.64 billion. The fund rose 32% last year – like the S&P Banks Index – compared to the 27% rise of the S&P 500 Index.
Overall, the earnings picture for banks is expected to be positive and analysts expect executives to issue an optimistic note on the core earnings outlook.
“The rally in financials makes a lot of sense because banks that make their money in corporate or mortgage lending benefit from a steeper yield curve, while banks and brokers with clearing operations benefit from short rates. higher,” said Steve Sosnick, chief strategist. at Interactive Brokers.
“We have both, but the speed of movement inspires some suspicion, and therefore coverage,” he said.