Bearish strategy on regional banks


Regional banks have been lagging the S&P 500 and the broader financial sector, and now one investor is positioning for a drop using the SPDR KBW Regional Banking exchange-traded fund.

optionMONSTER's Depth Charge tracking system detected the purchase of about 16,000 December 23 puts on the fund for approximately $1.85. At the same time, matching amounts of the December 19 puts and December 26 calls were sold for $0.55 and $0.85 respectively. Volume was more than 35 times open interest in all three strikes.

KRE Chart KRE rose 0.25 percent to $23.88 yesterday. Although fund significantly outperformed other sectors in the first four months of the year, it's down 14 percent since the beginning of May, compared with a 9 percent drop for financials overall and a 7 percent decline for the S&P 500 over the same period.

Regional banks continue to feel the effects of the mortgage-bubble collapse, without receiving the benefits of greater capital-market activity. Moody's also said earlier in the week that it might downgrade some banks in the sector because they're less likely to get government bailouts under the new financial regulation law.

Yesterday's three-part option trade is designed to profit from KRE pushing lower.  It cost a net $0.45 per put contract to implement and will earn a maximum profit of 789 percent if KRE closes at or below $19 on expiration. Because of the short position in the calls, it will lose money if the fund rallies above $26.

The transaction pushed total options volume in KRE to 42 times greater than average, according to the Depth Charge.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: KRE



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