KRE Gets 'Most Unusual Option Trade' Award

During my daily classes on TheoTrade, I’ve been discussing the bullish option activity in regional banks for several weeks. Before the recent rally got started, there were several unusual option trades which were pointing to a bullish move.

If you missed it, check out this post today discussing some of the bullish dynamics brewing in regional banks.

With stimulus and willing Federal Reserve to monetize virtually everything, it makes sense that lending institutions would fare better with a steeper yield curve. However, that is not a foregone conclusion without even more draconian measures from the Federal Reserve.

It is with this backdrop that I present SPDR S&P Regional Banking ETF (NYSEARCA: KRE) with the Most Unusual Trade of the Week.

KRE Option Activity

The option activity on the regional bank ETF was sizzling today. At over double the average, it showed increased interest in the opportunity in this industry. Nearly 62% of call option volume occurred between the market and 40% of the put option volume was filled at the ask. On the surface, you may walk away with a bearish impression with the put volume outpacing call volume.

This is where looking for large block activity can be important. Viewing time and sales data for Large block trades is helpful at finding unusual trades. It will also help you identify potential spread trades. Here is an overview of two large, four-legged option trades made on KRE today.

  • 6,000 18 JUN 21 $43 call BOT @ $4.29 to $4.34
  • 12,000 18 JUN 21 $49 call sold @ $2.15 to $2.17
  • 6,000 18 JUN 21 $42 put sold @ $5.10 to $5.11
  • 12,000 18 JUN 21 34 put BOT @ $1.99 to $2.00

It is unusual to see a trade that combines two ratio backspreads like this. Recently, it’s been more common to see large trades where the ratio back spread buys the closer strike and sell more further OTM strike. However, this trade combines both varieties.

A quick look at the skewed volatility term structure for the June 2021 expiration doesn’t really support a trade like this. This indicates that the price outlook was a bigger consideration than volatility. Let’s take a closer look at the risk profile to understand these expectations.  

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