Trade Update – $XLF: Bank Deposit

by Dan December 19, 2013 3:45 pm • Commentary

Towards the end of November we put on a couple bullish XLF trades (below) to position for a technical breakout in the new year of the bank etf. Currently the ratio spread (the first trade) can be adjusted in a way that closes any downside risk and leaves a free look to the upside. Here’s how:

ACTION – XLF ($21.61) Close Jan 21/22 risk reversal for even, leave long 1 Jan 22 call from original trade at zero cost

-Buying to close 1 Jan 21 put for .18

-Selling to close 1 Jan 22 call at .18


As for the second trade, the XLF Dec / Jan 22 Call Spread this trade is working out perfectly with Dec 22 call set to expire worthless tomorrow and we own the Jan 22 call for .10 (currently trading .18)



Original Post Nov 21st, 2013: 

Adult Swim Trade – $XLF: Bank Deposit

Yesterday in the MorningWord we detailed the out-performance of U.S. banks vs the Euro Banks in the first half of the year, and then the subsequent flip flop since July.  With JPM’s monster DOJ settlement out of the way, it appears that banks want to push higher as the XLF today is making new 52 week highs and building what technicians would call a flag.

XLF 1yr chart from Bloomberg
XLF 1yr chart from Bloomberg

Backing the chart out to the breakdown levels in 2008, when sector etf dropped off of a cliff during the throws of the financial crisis, the etf is now just getting back to those levels:

XLF 6yr chart from Bloomberg
XLF 6yr chart from Bloomberg

The technical set up certainly looks poised for a move higher.  If you are inclined to play for a meaningful breakout into the new year, and you are eyeing Q4 earnings results as a potential positive catalyst (4 of the top 5 components of the etf all report in Jan Expiration: BAC, C, JPM & WFC) then rather than buying the stock here, levered risk reversals could make a lot of sense.  For those who are not inclined to sell puts and are less interested in buying the years highs in an effort to get long exposure in the new year I will lay out a more conservative way to get long calls that offers much less delta exposure.

I am not personally dying to get long at the highs, but playing for breakout with options looks interesting.

 1. Adult Swim Trade Structure: XLF ($21.37) Sell 1 Jan 21 Put to Buy 2 Jan 22 Calls for Even $

-Sell 1 Jan 21 Put at .38

-Buy 2 Jan 22 Calls for .19 each or .38 total

Break-Even on Jan Expiration:

Profits: Above 22 see levered gains.

Losses:  Put 100 shares of stock at 21, losses below there.

Trade Rationale:  Despite being closer to the put strike, the nice thing about this structure is the potential for levered gains to the upside, with a fairly wide range on Jan expiration where there is no negative PnL.  I risk being put 100 shares at 21 on downside, down .37, but I get long 200 shares at 22, up .63 on the upside.  If you are inclined to buy the stock here, this has a more favorable risk/reward set up.


2. Conservative Trade Structure: XLF ($21.39) Buy Dec 27th/ Jan 18th 22 Call Calendar for .10

-Sell 1 Dec 27th 22 call at .10

-Buy 1 Jan 18th 22 Call for .20

Break-Even on Dec 27th Expiration:

If stock is 22 or lower the Dec call expires worthless and you own the Jan 22 call for .10 with a break-even then of 22.10 on Jan expiration.

Trade Rationale:  As I state above this trade near term has little directional exposure, but could be a way to own dollar cheap calls into the new year. There is a massive delta difference in this trade vs the risk reversal. This trade is threading the needle but with alot less risk. The risk reversal is the equivalent in deltas of long stock but with some leeway between 21 and 22.