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Traders make a big bet on the financial sector, these stocks ahead of earnings

Key Points
  • Heavy options activity in financial ETF (XLF) call options, according to trader Pete Najarian.
  • Options traders are also betting on Broadcom, HD Supply ahead of earnings.
  • Najarian scored winning trades on Humana and Bank of America this week.

Investors are making big bets that financial stocks will continue to move higher in the near term.

This week investors bought more than 300 thousand call options in the Financial Sector SPDR ETF (XLF) at the December 28 strike price, according to Investitute co-founder and "Halftime Report" trader Pete Najarian.

On Thursday the ETF closed at $27.52, so investors are expecting a move of at least 1.47 percent by December 29, which is when the options expire.

Bank stocks outperformed this week -- the XLF hit a more than 10-year high on Thursday -- amidst a broader market rotation that saw investors move out of sectors like tech.

Given the financial sector's more than 17 percent gain this year, Najarian thinks the heavy options activity in the XLF could be investors taking some money off the table, while retaining exposure to the sector should it continue to move higher.

He noted that this week there was also heavy options activity in XLF January 28.5 calls. That would represent a 3.56 percentage gain from Thursday's close.

In addition to bank stocks, Najarian is watching HD Supply and Broadom after spotting heavy call buying in the names on Thursday. Both companies are set to report quarterly results next week -- HD supply on Tuesday, Broadom on Wednesday -- so these bets could be traders predicting post-earnings jumps.

Traders bet on bank stocks

The Najarians track the options market as a way to spot buying opportunities that might go unnoticed. Heavy volume can sometimes indicate the market's expectation for upcoming equity moves.

This week Pete Najarian also spotted unusual trading activity in Humana and Bank of America.

On Monday bullish investors bought more than three thousand Humana calls at the January 250 strike price. Since then the stock has blown through that level -- it's up 8.46 percent and as of Thursday's close was trading at $260.86.

Bulls make a big bet on Humana

On Wednesday Najarian spotted bullish activity in Bank of America. Traders bought more than twelve thousand calls at the 28.50 price strike that expire on December 22. As of Thursday's close the stock was trading at 28.17, which is a nearly two percent gain in just two days.

Options market says Bank of America is heading higher