XLF was down $0.12 to $19.45 Friday, but has added 18.7% in the first six months of the year. In the options market, much of the recent activity in XLF has been focused on July and August 19 put options.
In contrast to the first quarter, when defensive names like utilities, healthcare and consumer staples names led the S&P 500 to a 10% gain, the second quarter saw mixed action across the nine key economic sectors and the S&P 500 rose just 2.6%. Utilities, energy and basic materials names saw relative weakness. Healthcare and cyclicals were areas of strength. However, financials were the best performing sector after the XLF gained 7.5%.
While financials have been a bright spot over the past few months, the order flow in the options market seems to reflect a cautious or bearish short-term view on the sector. Friday, for example, 94,400 July 19 puts traded on XLF, including a morning buyer of 50,000 contracts for $0.24 per contract. It was an opening position.
The bearish trading is part of an ongoing theme seen during the past month. Players have not only been buying July 19 puts, where open interest is now more than 290,000 contracts, but also in August 19 puts. Open interest in XLF August 19s is now 445K and one of the larget blocks of OI among all US-listed options today.
The huge open interest that is building in 19 puts on XLF in recent weeks is unusual given the relative strength in the sector over the past few months. It's not clear if some "smart money" players are concerned about a potential catalyst that will send shares of the major banks or brokers lower, or whether the flow is merely hedging activity after the recent increase in market volatility since early-May. For whatever reason, the there's a lot of put buying in XLF and, until it subsides, I remain cautious on the sector as well.
By Henry Schwartz