Chart of the Day – $XLF: Bank Teller?

by CC September 25, 2015 1:05 pm • Chart of the Day• Commentary

Last night on CNBC’s Fast Money Dan highlighted some put activity in the XLF, the Financial Sector etf. Watch here:

Here were Dan’s notes for the segment:

Sizzle: put volume was 1.5x average daily volume.
Trade: largest print of the day in XLF was a buy of 35,000 Oct 30th 22 puts when stock was $22.40, paying .51 to open.    these break-even down at $21.49, down 4%
Why bearish trading?? Possibly protection against bank holdings or maybe an outright bearish bet against large cap banks as nearly 50% of the XLF will report by Oct 30th
Let’s focus on the three charts that Dan referenced in the clip.  First the one year chart, with the circle of the opening and close on Aug 24th, the day that the U.S. market flash-crashed. The XLF opened down 6% at $22.19, traded as low as 18.52, down 21% from the prior close, and then closed at $22.65.   The volatility bands have been massively widened. This is important because this put activity appears to be targeting the potential that XLF breaks below $22:
XLF 1yr chart from Bloomberg
XLF 1yr chart from Bloomberg

And here is the 5 year chart of the XLF, showing the etf’s break of the uptrend that has been in place since late 2011, and the importance of $22 support in the near term, with little support below for another 10%:

XLF 5 yr chart from Bloomberg
XLF 5 yr chart from Bloomberg

And lastly the five year chart of options prices for XLF, with 30 day at the money implied vol clearly elevated at 20.6%, well above the 1yr average just below 15%:

XLF five year chart of 30 day at the money Implied Volatility fro Bloomberg
XLF five year chart of 30 day at the money Implied Volatility fro Bloomberg

What’s interesting about options prices for XLF is that until very recently they have been trending down since the Sovereign Debt crisis in Europe in late 2011. But if things heat up in emerging markets, specifically in China and Brazil (most likely Brazil first), then investors will shoot first and ask questions later related to most of the world’s largest financial institutions.

For the second straight day put volume in the XLF is running hot, already 1.5x average daily volume, with one large trade making up most of that volume. When the etf was $22.80 (at 10am), 100,000 of the March 21 puts traded at .73, they were reportedly bought.  But on Wednesday, when the etf was $22.55, 100k of these puts were (definitely) bought to open for .73. So today’s trade could actually be a closing sale.  Taking a quick look at IV in this strike they didn’t move that much, signalling that they may have been sold to close. We will take a look at the change in open interest on Monday for confirmation.

Again, regular readers know we don’t place a ton of emphasis on unusual options activity. Without intimate knowledge of the trade it is impossible to know the initiator’s intent. But why would anyone blindly follow a trade or nebulous intent in this market??