Financial stocks staged a mild recovery on Monday, but the rebound didn't encourage options speculators to make bullish bets on the sector.
The Financial Select Sector SPDR (XLF) rose by as much at 0.75% after Deutsche Bank analyst Mike Mayo upgraded JPMorgan Chase from Hold to Buy, and both US Bancorp and Comerica from Sell to Hold.
Mayo based the upgrades on "a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage."
While the XLF has moved higher, options players remain "a bit more cautious," according to Andrew Wilkinson, senior strategist at Interactive Brokers Group. "This is another early call through options of skepticism about today's bounce in financials".
Volume in XLF put options, giving the holder the right to sell, has swamped trading in calls, giving you the right to buy, by a margin of 2.5 to 1.
The heaviest volume in the XLF is the 34 September strike put where over 11,000 contracts have traded. Volume is also heavy in the 33 strike and in the December 32 puts.
The market is also pricing in risk for further price swings in the XLF as implied volatility is holding at close to 40% versus a six month average of about 20.
Goldman Sachs call options volume has been outpacing activity in the Goldman puts by a factor of 1.6-times today.
The firm says it doesn't plan to unwind two hedge funds - its Global Alpha and North American Equity Opportunities funds - following losses the funds have suffered amid recent market volatility.
While the activity is bullish today, Wilkinson notes that "overall open interest continues to favor the put side."
"Despite acknowledgement that the fund has lost some 30 percent of its value for the year to date, a loss that culminated in last week’s precipitous subprime-driven selloff, Goldman shares traded 1 percent higher," according to Wilkinson.