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 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)
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