Bidding for the Banks

Yesterday we had the rally that never was.  On the face of it, the U.S. keeps getting glimmers of good news (jobs) and the Europeans keep getting bad ones (Spain downgraded).  What does get the market going is hope of central bank intervention.  Spain gets downgraded and they will have to go to the ECB and then the crisis is solved or that is how the market sees it.  How do the banks see it after all they have vested interest in the flow of money in the US and abroad?

On a day when the VIX came in (again) because none of the news met the junk threshold set for it the volatility popped in another place.  The volatility in the XLF took a flyer at the end of the day.  Right now the realized volatility of the XLF is pretty low at around 10..40 and it would be hard to justify buying any juice on that basis except there are some big earnings coming and gamma could play here.  Chart from LiveVol Pro.

There was pretty big buying volume in the October ATM strike in the XLF.  Two key earnings are coming out in JPM and WFC and some players wanted to get a position on.  Why at the end of the day?  Well things sold off slowly from the morning high and volatility was coming in all around market wide.  Also, the straddle at .31 bid is not very expensive in dollar terms.  It really is a flyer on the earnings of two of the biggest, if not the biggest, banks and earnings in those two most likely will be a bellwether that should carry other financial stocks one way or the other.

Is buying the ATM straddle a bad idea?  I think you get the gamma+.  What I mean is that good reports (or bad) in the two big banks should reverberate and push the XLF a bit more than normal.    That should make for a nice trade by the end of next week.

The Trade
I like owning the XLF ATM straddles (Oct is better) if there is a shot to pick them up close to the closing price of today then ride the sentiment wave good or bad through next week.  The high of the year in XLF is 16.44 and it won’t take a whole lot to get back there.

About Mark Sebastian

Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University. To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com