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Analysis-With banks' results on tap, options traders prepare for volatility

Wednesday, January 11, 2023
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By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Options traders are bracing for volatility in U.S. bank shares days ahead of an earnings season many believe will bring lower profits and reflect worries over an expected recession.

Current market positioning signals a gloomy outlook: The one-month moving average of open puts on the Financial Select Sector SPDR Fund, the largest financials ETF with nearly $33 billions in assets, outnumbers call options, 1.8-to-1, the most defensive this measure has been since late October.

One standout trade on Monday saw a put buyer pay $1.5 million for 50,000 of February puts on XLF. The trade would be profitable if the ETF’s shares slipped below $33 by mid-February, a 6% decline from current levels.

"What you are seeing in markets is some concern whether or not the operating environment is going to be favorable for financials," said Scott Knapp, chief market strategist at CUNA Mutual Group. "It's a challenging environment where it is tough to earn a nickel ... markets are getting ahead by discounting some of that."

Bank of America (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup Inc (NYSE:C) are set to report results Friday, with other lenders to follow next week.

Shares of banks have been pummeled alongside broader markets in the past year as the Federal Reserve raised rates at a rapid clip to fight the worst inflation in decades. The S&P 500 bank index fell 21.6% last year, compared to a compared to a 19.4% decline for the S&P 500 as a whole.

Banks shares have historically been volatile around earnings time and traders expect U.S. consumer price data on Thursday -- which has set off big market swings in recent months -- to add an extra dose of choppiness this time around.

Options on big bank stocks, on average, are pricing the largest post-earnings moves in the last two years, an analysis by Susquehanna International Group showed.

"The trading bias in the options heading into big bank earnings has been buying volatility and protecting positions," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. "It's definitely more pronounced than it has been historically."

GRAPHIC: Braced for volatility (https://www.reuters.com/graphics/USA-STOCKS/akpeqaqekpr/chart.png)

Many believe rising prices and higher borrowing will take a toll on lenders' bottom lines by prompting consumers and businesses to curb their spending. Since banks serve as economic middlemen, their profits decline when activity slows.

Analysts expect S&P 500 financial sector earnings to have declined by 8.7% in the fourth quarter from a year ago, tied with the technology sector as the fourth-biggest projected drop among major sectors for the period, according to IBES data from Refinitiv.

Meanwhile, Goldman Sachs Group (NYSE:GS) will start cutting thousands of jobs across the firm from Wednesday, as it prepares for a tough economic environment, the latest among big banks, including Morgan Stanley (NYSE:MS) and Citigroup Inc, to cut their work force in recent months as a dealmaking boom on Wall Street fizzled out partly due to high interest rates.

Not everyone has a gloomy outlook for the sector. In a Monday research note, Bank of America said financials have better earnings stability than the S&P 500, cleaner balance sheets and less recession risk than "other more crowded and expensive cyclical sectors like Info Tech."

"U.S. financials may be a good spot to park assets in the near-term," wrote Savita Subramanian, equity & quant strategist for BofA Global Research.

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04-03-2024 19:07:28 (UTC+7)

EUR/USD

1.0856

+0.0019 (+0.18%)

Summary

Sell

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (0)

Sell (6)

EUR/USD

1.0856

+0.0019 (+0.18%)

Summary

Sell

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (0)

Sell (6)

GBP/USD

1.2678

+0.0028 (+0.22%)

Summary

Buy

Moving Avg:

Buy (10)

Sell (2)

Indicators:

Buy (4)

Sell (2)

USD/JPY

150.43

+0.32 (+0.21%)

Summary

↑ Sell

Moving Avg:

Buy (4)

Sell (8)

Indicators:

Buy (1)

Sell (9)

AUD/USD

0.6521

-0.0001 (-0.02%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

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Sell (5)

USD/CAD

1.3567

+0.0010 (+0.07%)

Summary

↑ Buy

Moving Avg:

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EUR/JPY

163.28

+0.67 (+0.41%)

Summary

↑ Sell

Moving Avg:

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Sell (8)

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Sell (7)

EUR/CHF

0.9596

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Gold Futures

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Silver Futures

23.343

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Copper Futures

3.8683

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Euro Stoxx 50

4,907.75

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17,721.05

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16,595.97

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2,076.39

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Moving Avg:

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47.220

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Adidas AG

185.51

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Deutsche Lufthansa AG

7.068

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Summary

Buy

Moving Avg:

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Siemens AG Class N

181.80

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12.540

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Sell (11)

    EUR/USD 1.0856 Sell  
    GBP/USD 1.2678 Buy  
    USD/JPY 150.43 ↑ Sell  
    AUD/USD 0.6521 ↑ Sell  
    USD/CAD 1.3567 ↑ Buy  
    EUR/JPY 163.28 ↑ Sell  
    EUR/CHF 0.9596 ↑ Buy  
    Gold 2,090.85 ↑ Sell  
    Silver 23.343 ↑ Sell  
    Copper 3.8683 ↑ Sell  
    Crude Oil WTI 79.42 ↑ Sell  
    Brent Oil 83.11 Sell  
    Natural Gas 1.931 Buy  
    US Coffee C 185.80 Sell  
    Euro Stoxx 50 4,907.75 ↑ Buy  
    S&P 500 5,137.08 ↑ Buy  
    DAX 17,721.05 Neutral  
    FTSE 100 7,644.15 ↑ Sell  
    Hang Seng 16,595.97 ↑ Buy  
    Small Cap 2000 2,076.39 ↑ Buy  
    IBEX 35 10,048.08 Buy  
    BASF 47.220 Buy  
    Bayer 28.25 ↑ Buy  
    Allianz 251.58 ↑ Buy  
    Adidas 185.51 ↑ Buy  
    Lufthansa 7.068 Buy  
    Siemens AG 181.80 ↑ Buy  
    Deutsche Bank AG 12.540 ↑ Sell  
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