Regional bank ETF's options draw defensive plays with earnings ahead

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Traders in the U.S. equity options market are guarding against a drop in shares of the biggest regional bank exchange-traded fund, days before reports from lenders are set to kick off the corporate earnings season.

The $3.8 billion SPDR S&P Regional Banking ETF, which tracks regional bank stocks, was recently down 2.3% at $50.56. The S&P 500, by contrast, was down around 0.2%.

The defensive options bets are likely from investors guarding against possible declines following earnings report from the sector, market participants said. JPMorgan Chase, Bank of America and Wells Fargo are all set to report on Friday, with other big banks to post results in the following days.

"If the big banks sneeze, the smaller banks catch cold, so playing defense in KRE is not unreasonable from that viewpoint," said Steve Sosnick, chief strategist at Interactive Brokers.

While the positioning is not "overwhelmingly" defensive, general investor disinterest in hedging with put options in the broader market may be throwing the bearish trading in KRE into sharper relief, Sosnick said.

On Thursday, some 134,000 KRE options contracts changed hands by 1:30 p.m. (1830 GMT), or 1.8 times the usual volume. Volume in put contracts, typically bought to protect against a drop in a share price, was twice its daily pace, according to data from options analytics service Trade Alert.

Thursday's action follows a large bearish trade on Wednesday in which a trader bought 56,000 put contracts for $4.6 million to guard against a more than 16% decline in the ETFs shares by mid-May.

"We had seen more selling in KRE recently, but this is a big downside volatility purchase," Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, said in a note.

The Financial Select Sector SPDR Fund, which counts some of the biggest U.S. banks in its top 10 largest holdings, also drew bearish options action on Thursday. The financials ETF's shares were down 0.7% in afternoon trade on Thursday.

KRE shares are up about 40% since May 2023, when they bottomed after the collapse of several regional banks. Options traders expect KRE shares to swing by 3.5%, in either direction by Friday, Jan. 19, LSEG data showed.

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)

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