Financials are in focus this week as big banks earnings get underway. But one trader is betting the results could spark a massive selloff in next month.
On Monday, before bank earnings officially kicked off, one trader bet more than $260,000 that the could fall more than 8 percent in just four weeks. Specifically, that trader purchased 24,000 of the August 23-strike puts for 11 cents each. Since buying a put allows a trader to sell a stock, or in this case ETF, at a set price for a given price at a set time, this is a bearish bet the XLF will fall below $22.99 by August expiration.
Khouw characterized the trade as "disaster insurance" for the financials rather than an outright bearish call. "It could be a hedge considering that the financials have generally been in favor heading into this earnings season," he added. The ETF is up more than 2.5 percent in the past 3 months.
JPMorgan and Wells Fargo kicked off the second-quarter reports Tuesday before the opening bell with mixed results: JPMorgan reported an earnings beat on both the top and bottom lines while Wells Fargo matched on EPS but missed on revenue. Other financial institutions expected to report this week include Bank of America on Wednesday and Citigroup and Goldman on Thursday.
The XLF was trading slightly higher in early Tuesday trading.