After a fairly long period of under-performance to the broad market in 2017, bank stocks ,as measured by the S&P Financial Select XLF, made a new 52 week and multi-year high. This follows a 10% run from its lows in early September to the recent highs, prior to many of its large components earnings over the last week:
Since last Thursday BAC, C, GS, JPM & MS, which make up about 35% of the weight of the XLF, are all a bit lower, with only BAC higher over that period.
Put options volume ran hot today, with most of the 350,000 contracts coming in one trade, one that is likely an investor slapping on some protection to a basket of banks stocks. When the XLF was $26.15 a trader bought to open 146,000 of the Jan 25 / 22 put spreads, paying about 30 cents. This trade breaks-even down at $24.70, down about 6% from the trading level, offering a potential payout of up to 2.70 between $24.70 and $22 with the max payout of $2.70 or nearly $39.5 million in premium if the XLF is 22 or lower on Jan expiration.
The choice of strikes are fairly interesting in this put spread, with the chart dating back to the start of 2015 possibly instructive. There appears to be an air pocket below the Sept low near $24 and the late 2016 post-election breakout to new highs near $21.
If this is indeed a hedge, this trader is looking to start protection just above that level for any possible retracement below the 2017 consolidation and down to levels we haven’t seen since the election. Costing just 30 cents at these low vol levels even a minor pullback is likely to see a pop in vol and the put spread could lessen the blow even without being in the money.