Market Insights

Put volume is usually bearish, but that might not be the case with a huge trade yesterday.

More than 177,000 puts traded in the SPDR S&P Regional Bank ETF (KRE) on Monday. That was about 65 times more than the volume in calls.

Puts fix the price where a stock can be sold, so they tend to appreciate to the downside. (See our Knowledge Center.) Traders often consider spikes in put volume to be a sign of negativity.

So why wasn’t it the case yesterday? Simply put, because it appears that the contracts are hedging a large bullish position. And, it looks like they may have added to that long.

Here’s what happened:

• Blocks of 38,153 contracts each traded in the June 45 puts and June 51 puts early in the afternoon. Volume was below open interest in both, which suggests an existing transaction was closed.
• At the same second, blocks of 43,179 contracts each traded in the June 48 puts and June 54 puts. Volume was above open interest in both, which indicates new positions were opened.

There are two possible explanations for the trade. First (and more likely), the investor came into the session with a June 51-June 45 put spread. He or she then closed it and rolled it up to the June 54-48 spread.

Interpreting the Activity

That kind of activity could have been a hedge on a long position in the underlying KRE fund. The facts they paid more premium and raised the level where they’re protected (from $51 to $54) are consistent with someone holding a position in hope of more gains.

They also upsized by 5,026 contracts. That could also be bullish as well, indicating they added roughly 500,000 shares of the fund. (Each option contract controls 100 shares.)

KRE fell 0.16 percent to $56.55, fighting its way back from a drop of more than 2 percent. Its big holdings include Sterling Bancorp (STL), Texas Capital (TCBI) and CIT (CIT).

The fund has consolidated in a tight range as it pushes against its 200-day moving average and its February peaks. Some investors may like banking stocks because, like other financials, they may benefit from the strong domestic economy. Is a breakout coming?

A second explanation for Monday’s activity is that the trader entered the session with a put credit spread, which is similar to owning stock. In that case, he or she may have raised the spread to collect more premium and increased its size. While less probable, such a transaction would also reflect a bullish sentiment.