In anticipation of strong first-quarter bank earnings, options traders were taking on bullish positions in exchange traded funds that follow financial stocks. However, the financial sector ETF fell into the red Friday.
On Thursday, financial sector stocks and ETFs were rising ahead of company earnings as options traders piled into calls – futures options associated with bets on potential share gains, reports Doris Frankel for Reuters.
Call options are used to take bets on a rise in share prices and to hedge against short positions in the underlying security. The contracts allow an investor to purchase shares at a predescribed price up till the expiration of the contract.
Call buyers were looking for strength in the banking sector on results from JP Morgan (NYSE: JPM) and Wells Fargo (WFC). However, the stocks and financial ETFs fell Friday after they reported quarterly earnings. Fresh Eurozone worries also weighed on bank ETFs.
“[Thursday’s] call buyers are possibly anticipating additional short-term strength in the financials heading into earnings reports from JP Morgan and Wells Fargo tomorrow morning,” WhatsTrading.com options strategist Frederic Ruffy said in the report.
For instance, a total of 132,000 calls and 72,000 puts were made on the Financial Select Sector SPDR (NYSEArca: XLF).
“The call buying in the XLF, notably the May $16 strike calls, looks to be a bullish bet on positive developments on the banks from their upcoming earnings,” C.C. Lagator, a co-founder of RiskReversal.com added.
“Our take is that this call buying reflects optimism about JP Morgan and other large constituents of the XLF,” Jon Najarian, a co-founder of brokerage firm TradeMonster.com, said.
However, the financial ETF fell about 2% on Friday.
Financial Select Sector SPDR
For more information on the financials sector, visit our financial category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.