Analysis: Gloomy U.S. bank sector could yield payoff for contrarian options bets
10/04/2023 16:14
By Saqib Iqbal Ahmed
NEW YORK, April 10 (Reuters) - Weeks after a banking
crisis pummeled financial stocks, some options strategists say
the heightened pessimism in the sector presents an attractive
opportunity to position for a rebound ahead of earnings season.
While the S&P 500 index .SPX has advanced 6% since
mid-March, when the failure of Silicon Valley Bank (SVB) sparked
tumult in the banking sector, investors have been more wary of
financial stocks. The S&P 500 Banks Group .SPXBK is up just 3%
from its March low and remains down 14% for the year.
The pervasive gloom around financial stocks has increased
the cost for investors betting on more downside while making it
relatively inexpensive to bet on a rebound. With banks set to
kick off their earnings on Friday, the risk-reward may be
favorable to investors brave enough to step in with contrarian
wagers, option mavens say.
"Upside pricing is attractive relative to downside in many
of these stocks," said Anand Omprakash, head of derivatives and
quantitative strategy at Elevation Securities.
JPMorgan Chase JPM.N , Citigroup Inc C.N and Wells Fargo
WFC.N are set to report results on Friday, while Goldman Sachs
GS.N , Morgan Stanley MS.N and Bank Of America BAC.N are on
deck the following week.
Positioning in options markets illustrates the pessimism
that has dogged the sector for weeks, even though worries over
financial stocks have ebbed after U.S. regulators backstopped
both depositors and financial institutions linked to SVB.
Thirty-day implied volatility skew - a measure of the
relative demand for puts versus calls - on JP Morgan Chase is at
22.8%, higher than it has been about 85% of the time over the
last year, data from Trade Alert showed. Bank of America and
Citigroup also show similarly elevated skew. Calls convey the
right to buy shares at a fixed price in the future, while puts
offer the right to sell stock at a set price.
Still, some investors appear to smell a bargain.
"Recent conversations with clients suggest some believe
upcoming earnings will be a positive catalyst for financials,"
said Amy Wu Silverman, head of derivatives strategy at RBC
Capital Markets.
Better-than-expected earnings and positive messaging from
CEOs could set the stage for investors to reverse a trade that
has seen them bet on downside in financials while seeking safety
in big tech stocks, according to Silverman. The S&P 500 tech
sector is up 10% since March 10.
"Using options is a good way to play that," she said.
Analysts expect S&P 500 financials .SPSY to post
year-over-year earnings growth in the first quarter of 4.3%,
according to I/B/E/S data from Refinitiv, making it among just
four sectors whose earnings are expected to climb. Investors
will scrutinize banks' balance sheets to assess how much capital
they hold, their levels of uninsured deposits and the potential
gains or losses from their securities portfolios.
For investors who believe financial earnings and guidance
will come in better than expected, Elevation Securities
recommended buying Financial Select Sector SPDR Fund XLF.P
call options at the 33 strike. On Monday, the XLF ETF was about
flat at $31.95.
Over the last two years, buying XLF shares on the day the
first of the big banks reported results and holding until the
end of the month has yielded 1.3% on average, according to
Refinitiv data.
"Given how beaten up bank stocks are, buying calls into
earnings can make sense," said Michael Purves, chief executive
officer at Tallbacken Capital Advisors.
But using options to position for upside can be risky,
especially for traders tempted by the richer put premiums to
sell puts to fund the purchase of upside calls, analysts warned.
Such trades would likely suffer steep losses if the selloff
in the sector resumed.
"(It's) not for the faint of heart," Silverman said.
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(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili
and Mark Porter)
((saqib.ahmed@thomsonreuters.com; @SaqibReports; +1 332 219
1971; Reuters Messaging:
saqib.ahmed.thomsonreuters.com@reuters.net))