After US bank shares soar, options traders face earnings-based volatility

Market pundits say bank stocks have rallied in recent weeks, but the resumption of hedging on exchange-traded funds in the financial sector could be a sign that investors are wary of volatility during earnings season.

With major banks like JP Morgan (JPM.N), Wells Fargo and Citigroup Inc (CN) expected to kick off earnings season on Friday, the one-month moving average of open put options on the Fund is expected to kick off. The Financial Sector SPDR (XLF .P) exceeds the number of open calls by almost 1.9.

This is the most bearish rate for a $48 billion financial ETF ahead of quarterly results since banks released Q1 2020 earnings, As per an analysis of one of the reputed news website the Trade Alert data shows – Puts are often used to protect against price declines, while calls are typically used to bet on price increases. Expectations of higher yields and new loans, coupled with a shift from growth stocks to economically sensitive and relatively cheap stocks, have pushed the financial sector’s S&P 500 (.SPSY) up 5 0.05% through Monday, the best start since 2012.

The options’ bearish positioning may reflect investors protecting industry earnings. Some of the biggest bank stocks have been notoriously volatile during earnings season, said Ilya Feygin, senior strategist at Wallach Beth Capital. For example, 4,444 JPMorgan shares fell for five straight quarters on earnings day. Shares of Citi and Wells Fargo have fallen on earnings days for six of the past eight quarters.

“I really don`t like being long this stuff into earnings. It presents a lot of downside gap risk,” Feygin said. The relative rise in put options comes on the heels of big inflows into the sector.
The XLF fund drew $2.15 billion dollars in December, its best month since May, helping lift 2021’s net inflows to a record $9.64 billion. The fund rose 32% last year same as the S&P banks index (.SPXBK) compared with the S&P 500 Index’s (.SPX) 27% rise. Overall, the banking results picture is likely to be positive and analysts expect executives to take an upbeat note on the key earnings outlook.

“The financial rally is significant, as banks that make money on business loans or mortgages have steeper yield curves, while banks and brokers have deals Clearing traders benefit from higher short-term rates,” said Steve Sosnick, chief strategist at Interactive Brokers. “We have both, but movement speed is questionable, and therefore coverage,” he said.