Big Hedge Detected in High Flying Sector

Big Hedge Detected in High Flying Sector

Regional banks are one of the strongest groups this year, and now a big investor seems to be hedging a large position.

Check out the options activity in the SPDR S&P Regional Bank ETF (KRE) yesterday:

  • A block of 39,265 April 51 puts was bought for $1.16.
  • An equal number of April 46 puts was sold at the same time for $0.35.
  • That translates into a net cost of $0.81.

Owning puts fixes the price where a security can be sold, while selling them generates income and creates an obligation to buy at a certain point. The two strategies can be combined in a spread to leverage a move between two levels.

Monday’s position will effectively sell the fund at $51 and buy it back at $46, collecting $5 in the process. When you consider they only paid $0.81, we’re talking about a potential profit of 517 percent from a 15 percent move. See our Knowledge Center for more.

SPDR S&P Regional Bank Index (KRE) with 50-day moving average and levels on put spread.

KRE rose 0.84 percent to $53.92. Its 15 percent gain so far this year is almost triple the appreciation of the broader S&P 500. Strong earnings help explain the outperformance.

Chart watchers may notice that KRE bounced near $51 in October. They may expect it to provide support again in the event of another decline. The put spread guards against a potential breakdown through that level.

Overall options volume was twice the monthly average in the session, with puts outnumbering calls by a bearish 8-to-1 ratio.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.