Financials Unusual Option Activity Report

In October, the trend in option activity in financials was decidedly bullish. On Oct 23, I posted on an unusual option trade that was made on the SPDR S&P Regional Banking ETF (NYSEARCA: KRE). Since that post, KRE has moved over 18% higher. However, that bullish tide may be receding as the option activity has suddenly turned rather bearish as we approach New Year’s.

Financials Option Activity

Monday’s option activity saw two large trades materialize on two different financial and banking ETFs. Here’s a description of the trading activity that happened today:

• Financial Select Sector SPDR Fund (NYSEARCA: XLF)
  • 16,159 17 DEC 21 $24 puts BOT @ $1.42 in one print
  • 16,159 17 DEC 21 $20 puts sold @ $0.65 in two prints

• SPDR S&P Regional Banking ETF (NYSEARCA: KRE)
  • 10,000 18 DEC 20 $50 puts BOT @ $0.58 to $0.68 mostly in two prints

• SPDR S&P Regional Banking ETF (NYSEARCA: KRE)
  • 5,000 31 DEC 20 $45 puts BOT @ $0.19 to $0.21
  • 5,000 31 DEC 20 $43 puts sold @ $ $0.07 to $0,09

The combination of these trades provides a range of bearish near-term expirations for the 18 DEC 20 expiration out to the longer-term expiration using 17 DEC 21.

Financials Technicals

Following the long run for financials off of the October lows, the price appears to be reaching a resistance. The option activity is providing a little more depth as to the potential near-term movement in these ETF products.

XLF Chart

XLF is currently testing its resistance near $29. Today’s candle saw the price gap higher at the open and is trading near the low of the session at the time of this writing. The recent trend began with the formation of support near $23 from October 29.

A 38.2% retracement would place the next level of support near $27 and the 61.8% retracement occurring near the August to October highs near $25.50. A break of the $25.50 level would indicate a full retracement to $23. The selection of the $20 strike introduces a retest of its May low near $20.

(Click on image to enlarge)

KRE Chart

The chart for KRE has been more bullish as the price broke through the 61.8% retracement level of the sell-off at the beginning of the year. The implication of the bullish breakout on November 9, 2020, is a full retracement near $60.

However, that doesn’t mean the price can’t experience a near-term pull back. The use of the 31 DEC 45/43 long put vertical provides an indication that the price is expected to test the area in between the 38.2% and 50% retracement level near the $43 strike price. The use of the 18 DEC 20 $50 puts certainly indicates some urgency in the potential correction. A pull-back to that level would keep the longer-term bullish trend intact.

(Click on image to enlarge)

Conclusion

The price activity certainly hasn’t been extremely bearish as of yet. However, this is why you look at this type of activity. It’s an attempt at identifying future trends in the price. Given the relatively extended nature of these ETFs and uncertainty over the direction of U.S. Treasury yields, these could be ways to create some negative delta in the event of a general sell-off in the market.