Ominous Options Trades in big Regional Bank ETF

Financial services stocks and exchange traded funds, a disappointing theme considering the Federal Reserve raised interest rates last month. However, a flattening yield curve and diminishing expectations for additional rate hikes this year has plagued the S&P 500’s second-largest sector weight.

The SPDR S&P Regional Banking ETF (NYSEArca: KRE) has not been immune to that trouble as highlighted by a nearly 18% year-to-date loss for the largest regional bank ETF.Contributing to the weakness in the bank sector, traders may have been unwinding bullish bets in the run-up to the Federal Reserve’s first rate hike in December, reports Stephen Foley for the Financial Times. Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.

While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. Nevertheless, market observers are weighing on the oil outlook in the recent earnings season.

The options market is also pointing to a sharp increase in the cost of insurance against a banking sector meltdown. In fact, some options traders are getting bearish on KRE.

“optionMONSTER’s Depth Charge market scanner shows that 10,000 June 29 puts were purchased in two evenly sized prints for $1.05 yesterday. These are clearly new positions, as volume surpassed open interest of 4,019 contracts,” according to optionMONSTER. “Long puts lock in the price where a stock can be sold, so they make money to the downside. Investors use them to hedge long positions or to speculate on a drop.”