Update: Bank Shots – XLF

by Dan July 13, 2017 1:03 pm • Trade Updates

U.S. bank stocks get Q2 earnings season in full swing tomorrow with reports from Citigroup (C), JP Morgan (JPM) and Wells Fargo (WFC).

The options market is implying the following one moves in either direction:

C: ~2% vs 4 qtr average one day move of less than 1%, 10 year average of 3.3%

JPM: ~1.7% vs 4 qtr average one day move of 1.1%, 10 year average of 2.6%

WFC: ~1.8% vs 4 qtr average one day move of 1.8%, 10 year average of 3.5%

These three stocks make up about 25% of the weight of the XLF. With the XLF at $25, the July 14th weekly straddle (the call premium + the put premium on tomorrow’s expiration) is offered at about 22 cents, or less than 1%, if you bought that and thus the implied daily move you would need a rally above 25.22 or a decline below $24.78 to make money.

On June 9th when the XLF was $24.25 we detailed a defined risk bearish strategy in the financial etf:

Break-even on Sept expiration 23.25, down 4%

Losses of up to 75 cents between 23.25 and 24 with max loss of 75 cents or 3%

If the etf were to dip below 23 we would look to spread these puts by selling a lower strike put.

These puts are now worth about 33 cents, or about 45% of their value from June 9th with the etf up about 3%.  Usually, as a rule, we like to stop long premium directional trades at 50% loss, but given the sharpness of the recent rally and 2 months to expiration and the existence of only dollar wide strikes, we think it makes sense to wait and see how bank stocks react to earnings over the next week or two before pulling the plug as the trade could get a second chance.

The one year chart of the XLF is interesting with fairly well-defined support and resistance levels. On a breakout above the prior 52 week high it would make sense to close the Sept puts, but on a disappointment, the stock will quickly be back at $24, while $23 serving as staunch support:


If I were inclined to trade the next week’s bank earnings (next week AXP, BAC, GS, MS & USB all report, or about 20% of the XLF) I would merely pay 25 cents for either the July 21st weekly call or put depending upon my directional inclination. If you get the direction right, there is a high probability of at least breaking even as you are only risking 1% of the etf price. But as always I’ll offer or normal disclaimer for long premium directional trades into events, you need to get a lot of things right to just break-even, direction, the magnitude of the move and timing.