A bright spring for the financial sector?

Financials have taken a breather after a monster rally, but yesterday’s option activity indicated sentiment may be turning bullish again.

The SPDR Financial Select Sector Fund (NYSE Arca: XLF) began the session up just 1.9 percent for 2017, less than one-third the return of the broader S&P 500 over the same period. That follows a runaway 20 percent quarterly surge in the last three months of 2016.

Buyers went to work in XLF’s 30-June 25 calls minutes after Thursday’s opening bell. The initial blocks priced for $0.27 but premiums rose to $0.36 by early afternoon as the money flowed in. They came back even hungrier after lunch and doubled their size with a giant purchase for $0.38. More than 229,000 contracts changed hands by the end of the session, making them the busiest options in the entire market.

Calls fix the price where a security can be bought, letting investors position for a move higher with limited capital at risk. The 25s will break even if XLF closes in the $25.27-25.38 range on expiration, but roughly double in value from a move to $25.70. They’ll become worthless if the fund remains below $25. It rose to $23.93 yesterday.

Investors have returned to the sector in the last year amid signs that banks have recovered from the 2007-2008 sub-prime crisis. Analysts also cited increased loan volumes, wider profits resulting from higher interest rates, and better trading revenues.1

SPDR Financial Fund (XLF)

Source: OptionsHouse by E*TRADE

Thursday’s options activity appeared 2-3 weeks before the industry's quarterly results. Was the trader banking (pun intended) that earnings will be a bullish catalyst? Consider this reporting lineup for heavyweight members in the XLF:

  • JPMorgan Chase (NYSE: JPM) – 11% of XLF: April 13
  • Wells Fargo (NYSE: WFC) – 9% of XLF: April 13
  • Citigroup (NYSE: C) – 6% of XLF: April 13
  • Bank of America (NYSE BAC) – 8% of XLF: April 18

The call buying also seems to represent a dramatic swing from negative sentiment earlier in the month. After all, consumer confidence on Tuesday surged to levels last seen in December 2000. Economic growth was revised higher than expected, oil prices have bounced, and housing data has continued to beat estimates.

Aside from the 30-June calls, XLF also saw approximately 100,000 April 24 calls bought for $0.25 to $0.31 and 55,000 of the May 25s gobbled up for $0.18. All told, volume was triple the monthly average in the fund, with calls outnumbering puts by more than 2 to 1.

In summary, some traders are looking for financial stocks to rally again after a few months of weakness in early 2017.

1. Bank of America Merrill Lynch: Stacking up the global brokers and universal banks - mostly healthy tailwinds into 2017. 3/1/17