Regional Bank as the corporate earnings season for banks approaches, U.S. equity options traders are displaying a defensive stance, particularly in anticipation of potential declines in the SPDR S&P Regional Banking ETF (KRE.P), which tracks regional bank stocks. This defensive positioning comes amid a broader market scenario where investors are closely monitoring the performance of major financial institutions.
KRE’s Pre-Earnings Decline and Defensive Options Plays
The SPDR S&P Regional Banking ETF, currently valued at $3.8 billion, recently experienced a 2.3% decline, bringing its value to $50.56. In contrast, the S&P 500 saw a more modest decline of around 0.2%. This discrepancy has triggered defensive options plays, with investors looking to hedge against potential drops in the ETF’s value following the upcoming earnings reports from the banking sector.
Major banks such as JPMorgan Chase (JPM.N), Bank of America (BAC.N), and Wells Fargo (WFC.N) are scheduled to report their earnings shortly. The defensive options strategies are considered prudent by market participants, recognizing the interconnected nature of the banking sector. Steve Sosnick, Chief Strategist at Interactive Brokers, aptly noted, “If the big banks sneeze, the smaller banks catch cold, so playing defense in KRE is not unreasonable from that viewpoint.”
Options Trading Activity Signals Defensive Posture
Options trading activity on Thursday revealed a notable defensive posture among investors. By 1:30 p.m. (1830 GMT), approximately 134,000 KRE options contracts had changed hands, representing 1.8 times the usual volume. The volume of put contracts, typically utilized to protect against share price declines, was twice its daily pace. This heightened activity follows a substantial bearish trade on the previous day, where a trader invested $4.6 million to acquire 56,000 put contracts, guarding against a potential more than 16% decline in the ETF’s shares by mid-May.
Chris Murphy, Co-Head of Derivative Strategy at Susquehanna Financial Group, highlighted the significance of this defensive move, stating, “We had seen more selling in KRE recently, but this is a big downside volatility purchase.”
Broader Impact on Financials ETF and Market Dynamics
The Financial Select Sector SPDR Fund (XLF.P), encompassing major U.S. banks among its top 10 holdings, also witnessed bearish options action on Thursday. The financials ETF experienced a 0.7% decline in afternoon trade, further highlighting the cautious sentiment in the financial sector.
KRE shares have demonstrated resilience, rising approximately 40% since their low point in May 2023, which followed the collapse of several regional banks. Options traders are anticipating a potential 3.5% swing in KRE shares in either direction by Friday, Jan. 19, according to LSEG data.
In conclusion, the defensive options strategies observed in the regional bank ETF indicate a cautious approach from investors ahead of the earnings season. The interconnected nature of the banking sector and the anticipation of major financial institutions’ performance contribute to this defensive stance, shaping the dynamics of the options market in the financial sector.