U.S. News

Options Report: Speculators Feast on Financial Sector

Jim Kingsland

Put options traders are zeroing in on financial stocks, which are getting hammered by growing credit market worries, while leaving leaving deal related names untouched.

With financing for big deals becoming more and more uncertain, many investors expect banks to be left holding billions of dollars of unsold debt. As a result, options speculators are buying up puts of banking and financial issues, expecting the stocks to fall further.  Deal related stocks are seeing little put speculation.

First and foremost put options in the Financial Select Sector SPDR ETF , an exchange-traded fund also known as the XLF has been a huge draw to put speculators.  The most actively traded XLF puts are the September 31 and September 34 strikes with volume in each exceeding 100,000 contracts today. Overall puts options volume across the entire chain of XLF options is trouncing call volume by a margin of 5 to 1.

The XLF is made up of 92 financial stocks ranging from Citigroup and Bank of America as its top holdings and Federated Investors and MGCI Investment as its smaller holdings.

The bearish speculation in the banking related names is a far different reality from just a few months ago when some bankers were gleefully proclaiming that it wouldn't be long before a $100 bln LBO would emerge to be quickly soaked up by the credit markets.

In Citigroup options trading, speculators have been scooping up the August 45 puts on speculation the stock will fall $2 more before expiration on the third Friday of August.  Over 19,000 of Citigroup August 45 puts have traded versus previous open interest of just over 10,000 contracts.

JP Morgan is another example. While put contract volumes aren't as large as volume seen in some of the Citigroup puts, speculation in far out of the money puts is notable.  In January options, which won't expire until the third Friday of January, trading has picked up down to the January 25 put strike.

Meantime, in some of the actual deal stocks where there have been concerns about banks having to take on the bulk of the financing, there has been little put speculation.

In First Data puts, Zero September put options have traded and only about 600 puts have traded in the August contract.

In Sallie Mae , just 270 September puts have traded.

In August TXU puts, just 75 August puts have traded.

Market makers for options in the deal names are not complacent, however, as implied volatiltiies in the options has moved higher in recent days, but volume remains muted.