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Regional banks are one of the strongest groups this year, and now a big investor seems to be hedging a large position.
Check out the options activity in the SPDR S&P Regional Bank ETF (KRE) yesterday:
Owning puts fixes the price where a security can be sold, while selling them generates income and creates an obligation to buy at a certain point. The two strategies can be combined in a spread to leverage a move between two levels.
Monday’s position will effectively sell the fund at $51 and buy it back at $46, collecting $5 in the process. When you consider they only paid $0.81, we’re talking about a potential profit of 517 percent from a 15 percent move. See our Knowledge Center for more.
SPDR S&P Regional Bank Index (KRE) with 50-day moving average and levels on put spread.
KRE rose 0.84 percent to $53.92. Its 15 percent gain so far this year is almost triple the appreciation of the broader S&P 500. Strong earnings help explain the outperformance.
Chart watchers may notice that KRE bounced near $51 in October. They may expect it to provide support again in the event of another decline. The put spread guards against a potential breakdown through that level.
Overall options volume was twice the monthly average in the session, with puts outnumbering calls by a bearish 8-to-1 ratio.
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