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Traders Take Bearish Bets Against Financial ETF


The U.S. Financials sector has unquestionably been one of the leaders from a relative strength standpoint compared to the broader market SPX (S&P 500 Index) year to date and in the trailing one year period, but it has still woefully underperformed the market in the trailing five year period (to the tune of some 4700 basis points).

That said, Financial Select Sector SPDR (XLF) options, which are normally very active in the marketplace have seen an uptick in activity on the put side in recent sessions, primarily with near term April 17 strike options being purchased. XLF has an expense ratio of 0.18%.

With the ETF trading at $18.25 currently 6.8% out of the money (not including the premium paid for the options) but it is worth noting that this sector ETF was trading with a low $17 handle (albeit briefly), just a little under one month ago in late February ($17.10 ultimate low).

The April options expiration cycle here covers all of the expected earnings releases of the major bank components of XLF (JPM, WFC, BAC, C), and considering the unidirectional trend in XLF thus far in 2013, it seems some contrarians have emerged, and may feel that stock prices in the sector have outpaced company fundamentals.

Near term protective put activity was the theme once again in Financials via XLF options yesterday, as the high flying sector ETF has recently shown some signs of weakening. This has been a recent theme we have reported here in the
past week or so, as options flows (which consistently were made up of call buyers for several months in this sector ETF), have recently shifted to downside put buying.

It is also important to note that April expiration will cover the expected earnings releases of major components here (JPM, WFC, BAC, C), so this activity could very well be an earnings play.

Relevant “short” or “inverse” ETFs in the Financials space that will likely see increased activity in the near term include FAZ (Direxion Daily Financial Bear 3X, Expense Ratio 0.95%), SEF (ProShares Short Financials, Expense Ratio 0.95%), SKF (ProShares UltraShort Financials, Expense Ratio 0.95%), FINZ (ProShares UltraPro Short Financials, Expense Ratio 0.95%), FAZ has especially seen a huge spike in volume in recent sessions as has SKF, which is not at all coincidental given the recent options flows in Financials.

The next few weeks should be very interesting given the upcoming earnings calendar and we will continue to monitor flows (net inflows recently in XLF >$450 million interestingly) and any additional options activity in the sector that may shed some light on how the end of the quarter may round out and heading into earnings season.

For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.