Options in financial ETF becomes a
crowd favorite
By
CHICAGO, July 25 (Reuters) - Traders flocked on Friday to
put options in an exchange-traded fund tracking the performance of the
financial sector on renewed fears that credit problems could create further
fallout in the battered sector.
The increased number of bearish bets in the Financial Select
Sector SPDR fund <XLF.A> may also be the result of U.S. regulators'
crackdown on short selling, affecting the shares of 19 major financial firms.
Roughly one million options traded in the XLF, with puts
outnumbering calls by a factor of 1.71, topping its normal level of 840,000
lots, according to Trade Alert.
The XLF, which holds the financial-related components from
the Standard & Poor's index, was the option crowd's top favorite, data from
option analytics firm Trade Alert showed.
"The put trading we are seeing in the XLF is protection
against a further sell-off in the financial sector, as well as a slight
increase in speculative trading on continued weakness in the overall
market," said Al Greenberg, head options trader at broker-dealer BNY ConvergEX Group.
Fundamentally, concerns about the impact of the housing
slump on the economy and the health of
"People are worried about credit quality and the
potential for additional failures in the banks," said Scott Fullman, director of derivative investment strategy at
broker-dealer WJB Capital Group.
SHORT RULE WILD CARD
But the increase in put volume in the XLF also coincides
with the U.S. Securities and Exchange Commission's emergency rule to curb
abusive short selling that took effect on Monday.
"We might be seeing increased put volumes because of
continued fear in the sector, but also because of the short selling
restrictions that are now in place in the equities market," said Joseph Cusick, senior market analyst at online brokerage OptionsXpress Holdings Inc.
"If there is someone who has a basket of these
financial services securities, they could be using the puts in the XLF as a
hedge."
Investors often turn to puts, conveying the right to sell
the security's shares at a given price and time, to protect against adverse
losses in the underlying stock.
The SEC rule requires an investor to borrow shares before
executing a short sale and to deliver the securities by settlement date.
Short selling is a legitimate trading strategy where an
investor arranges to borrow securities they believe are overvalued and sells
them in hopes of making a profit when the price drops.
The SEC is targeting "naked" short selling, which
occurs when an investor fails to borrow the stock ahead of time. It can be
illegal if done intentionally.
Most of the put action in the XLF on Friday was focused in
the August contract involving put spreads in the $17 and $19 strikes, while
investors also bought December $22 calls, according to Susquehanna Financial
Group in a research note.
Option traders this week also showed an inclination to use
put spreads in several bank stocks.
The trend began on Wednesday in Wells Fargo & Co
<WFC.N> and continued on Thursday with action in Bank of America Corp
<BAC.N> and Citigroup Inc <C.N>, which are both on the SEC list.
Citigroup put options were also active on Friday.
"The take away here is that option traders appear
readily positioned for a further unwind in the financials not withstanding some
intermittent catches of breath to the upside," said Interactive Brokers
Group analyst Rebecca Engmann Darst
in a note to clients.