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Hedge your bank calls after today’s central bank move (BNPQY, SCGLF, DB, XLF)

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Today traders started the day with massive central bank intervention to shield the credit markets from any liquidity failure, but this effort does not address the fundamental problems of the euro zone's financial system.

The Federal Reserve and other central banks have learned their lesson from the 2008 financial crisis in the U.S. and are moving to avoid another Lehman Brothers event.

The euro zone's financial system has two risk situations: the liquidation of credit for countries and the liquidation of credit for banks. It looks like credit dried up overnight for what appear to be a too large a failed bank.

This action might have been geared to shore up SocGen ( quote ), BNP Paribas ( quote ) or maybe even Deutsche Bank ( quote ), according to Robert Engle, professor of finance at NYU Stern. Click here for video .

The central banks' efforts also helped stabilize the U.S. banks after they were hit with a sweeping Standard & Poor's downgrade Tuesday night.

Although today has turned out to be great day for banks, one bad headline out of the euro zone can burst the balloon.

Traders that are long banks can use todays lift to lighten up on risk or take advantage of the vacuum volatility in the options market and purchase protective PUT against long positions.

Or if traders have more than one bank in their portfolio, look into an at-the-money protective PUT in the Select Sector Financial Select Sector SPDR Fund ( XLF , quote ) ETF that tracks the basket of U.S. bank stocks.

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


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

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