I Like Big Banks

Hey Traders,

The secret is out …

I like big banks and I cannot lie!

Financials have had a booming start to the year, fuelled higher by the hawkish Fed and higher bond yields.

And the pits are certainly not letting it go unnoticed …

These three tickers in particular caught my eye this week.

Financial Select Sector SPDR Fund (Ticker: XLF):

Before we dig into individual names, let’s take a look at XLF, which tracks the financial sector as a whole.

As you might expect, XLF has had a strong start to the year. While the shares closed at $39.05 on December 31, 2021, just one week later, XLF closed out the first trading week of the year at $41.17, an all-time high.

That’s a solid week-over-week gain of 5.5%, on a week that saw most of the broader market finish in the red.

The shares are now well above their 50-day moving average, which previously served as resistance several times during the month of December.

With no nearby overhead resistance, XLF seems to have plenty of room to run higher in the months ahead.

But what do the pits think?

Well, XLF options are cheap right now, with XLF’s implied volatility (IV) in the bottom 10% of its range.

However, XLF’s 30-day historical volatility (HV) is sitting just off its annual high, suggesting XLF has been moving more than usual.

While historical volatility and implied volatility are at nearly opposite ends of their own annual ranges, in reality, HV (lavender) only sits a bit over IV (red), in terms of points.

Of course, that didn’t stop XLF pits from getting hammered on Friday, with trading volume at more than 148% of its average daily amount. This heavy trading volume fell mostly on the call side, with 3.5 calls brought to open for every put.

This is actually rather unusual to see in XLF’s pits, which lately has seen put open interest outnumber calls at a ratio of 1.8-to-1.

In particular, traders are targeting the June 30-strike put, with 114,125 contracts open, followed by the January 37-strike put, with 102,454 contracts open. The most populated call contract is only the sixth highest open interest, with 76,509 contracts of the February 42-strike call currently outstanding.

Of course, with call open interest in only the ninth percentile of its annual range, that isn’t necessarily surprising.

Are the bulls finally going to come back to XLF’s pits?

If Friday’s heavy call flow was anything to judge by, XLF might be getting ready to welcome them back home …

Wells Fargo & Co. (Ticker: WFC):

Like XLF, WFC hit the ground running to launch its 2022. WFC closed out the final trading session of 2021 at $47.98, and climbed more than 14% to close out the first week of trading in the new year at $54.77, a four-year high.

In addition to general bullish tailwinds pumping up the financial sector, WFC also enjoyed an upgrade from an analyst at Barclays to “outperform” from “equal weight.” At the same time, the analyst increased WFC’s price target to $62, representing healthy potential upside even after this week’s strong performance.

I also noticed some bullish Big Money attention targeting the banking stock, which I noted to my Big Money Flow members.

During the first half of the week, one deep-pockets trader opened 11,000 contracts of the February 55/60-strike call spread, and I’m thinking they’re pretty happy with the way things have played out so far …

While their initial spreads were opened for a total cost of $0.95, that same spread at the close on Friday would have cost $1.56.

And broader bullish attention was also evident during Friday’s trading session, which saw 271% of WFC’s typical daily call volume cross the tape, outnumbering puts more than 3-to-1.

WFC’s open interest is also higher than usual, though calls hold a smaller-than-normal lead over put open interest at 1.1-to-1 (compared to the typical 1.7-to-1).

These traders may be taking advantage of WFC’s low 30-day IV (red), which sits in only the 30th percentile of its annual range. Meanwhile, the 30-day HV (lavender) sits in the 80th percentile, and as you can tell by the chart below, WFC traders have been getting more movement than they’ve been paying for.

Bank of America (Ticker: BAC):

Sticking with the theme, BAC came out of the gates racing this week, tacking on more than 10% from its December 31 close through the end of this week. The shares finished on Friday at $49.18, which happens to be a new all-time high for the stock.

The bank stock also received several accolades, including being named as one of Wells Fargo Equity Research’s top picks for 2022, though mixed analyst attention may have cut down some of the crowd enthusiasm.

Like WFC, BAC options traders have been getting a relative bang for their buck, with 30-day historic volatility (lavender) outpacing 30-day implied volatility (IV).

And it looks like traders are happy to take advantage of BAC options being “on sale.”

Friday saw BAC’s pits do more than 287% of their average daily volume, and calls outpaced puts 4.3-to-1.

That’s huge in a name that typically sees put and call open interest sitting about equal!

All three of BAC’s top open interest positions are calls, including the January 2023 50-strike call with 149,327 contracts outstanding, followed by the January 2022 45-strike and January 2022 50-strike calls with 111,742 and 103,745 contracts open, respectively.

BAC bulls are likely cheering this week’s price movement, and will be looking to see if the sector momentum can keep up through second week of trading this year.

Your Only Option,

Mark Sebastian


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