Trade Update $XLF: Rolling Oct Puts Out & Down

by Dan October 14, 2015 3:17 pm • Commentary

Last week on Oct 6th we made the case why weekly XLF puts appeared to be dollar cheap (not in implied volatility terms) considering that 30% of its components were reporting earnings this week.  To refresh here was the trade:  

Trade:  XLF ($23.10) Bought Oct16th  23 put for .25

This morning we got earnings from BAC, JPM and WFC and it was a bit of mixed bag, with JPM down nearly 3%, WFC down 1% and BAC up marginally. The main take-away is that it is a very tough trading environment for the banks and the anticipation of rising interest rates earlier in the year had raised expectations for higher net interest margins for large lenders, which appears to be off the table.

So with a couple trading days to Oct expiration we have to make a decision about these puts.  Tomorrow morning we will get results from C, GS, KEY & USB, all XLF components, which could be a fairly binary set up for the two day at the money puts.

We are now going to roll out of Oct and buy longer dated put spreads.

Action: Sell to Close XLF ($22.90) Oct 23 puts at .20 for 5 cent loss, and
New Trade: Buy to Open XLF ($22.90) Dec 22/20 put spread for .30
  • buy to open 1 Dec 22 put for .43
  • sell to open 1 Dec 20 put at .13

Break-Even on Dec Expiration:

Profits: gains of up to 1.70 (less the 3c loss on this week’s puts) below 21.70 with max gain at 20 or below.

Losses: losses of up to .30 (plus the 3c from this weeks puts) above 22

Rationale:  We want to give this bearish view some time to play out.  The fact that JPM, the bank deemed to be best in breed acts so poorly and is through key technical support at $60 leads us to beleive the rest could follow in the coming months as it becomes clear that the revenue environment is challenged and the Fed will not be raising rates.