Analysis: After U.S. bank stock surge, options traders brace for earnings-fueled volatility

NEW YORK (Reuters) – Bank stocks have surged in recent weeks, but the rebound in hedging in a major financial sector exchange-traded fund may be a sign that investors are wary of earnings season volatility, options market experts say. .

As major banks such as JP Morgan (JPM.N), Wells Fargo and Citigroup Inc (CN) prepare to kick off earnings season on Friday, the one-month moving average of call options open in the SPDR Financial Sector Fund (XLF.P) outperforms The number of open calls by a factor of approx. 1.9.

A Reuters analysis of trade alert data showed that this was the most downside for the $48 billion financial ETF ahead of quarterly results since banks reported earnings for the first quarter of 2020. Put options are typically used to hedge against lower prices, while longs are often used To bet on price gains.

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Expectations of higher yields and new lending, as well as a shift from growth stocks to economically sensitive and relatively cheap names, sent the S&P 500 Financial Index (.SPSY) up 5.05% through Monday, its best start to the year since 2012.

The position of bearish options is likely to reflect the protection of investors to the profits of the sector. Some major bank stocks have been notably volatile in earnings season, said Ilya Feigen, chief strategist at WallachBeth Capital.

For example, JPMorgan shares fell for five consecutive quarters on the day the results were announced. Citi and Wells Fargo shares have fallen on earnings day in 6 of the past 8 quarters.

“I don’t really like this stuff being long in earnings,” Feygin said. “It’s a lot of downside-gap risk.”

The relative rise in put options comes on the heels of significant inflows into the sector.

The XLF fund attracted $2.15 billion in December, its best month since May, helping drive its 2021 net inflows to a record $9.64 billion. The fund is up 32% last year — the same as the S&P Banks Index (.SPXBK) — compared with the S&P 500 (.SPX) soaring 27%.

Overall, the picture of banks’ results is likely to be positive and analysts expect CEOs to sound an optimistic note on the underlying earnings outlook. Read more

“The rise in the financial sector makes a lot of sense because banks that make their money on corporate loans or mortgages benefit from a steeper yield curve, while banks and brokers with clearing operations benefit from higher rates in the short term,” said Steve Sosnick, chief strategist. At Interactive Brokers.

“We’ve got both, but the speed of the move raises some doubts, so the hedge,” he said.

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(Narrated by Saqib Iqbal Ahmad). Editing by Ira Yusbashvili and Nick Szyminski

Our Standards: Thomson Reuters Trust Principles.

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