Bidding for the Banks
Today we had the rally that never was. On the face of it, the US keeps getting glimmers of good news (jobs), and the Europeans keep getting bad ones (Spain downgraded). What does get the market going is hope of central bank intervention. Spain gets downgraded, and they will have to go to the ECB and then the crisis is solved, or that is how the market sees it. How do the banks see it? After all, they have vested interest in the flow of money in the US and abroad?
On a day when the VIX came in (again), because none of the news met the junk threshold set for it, the volatility popped in another place. The volatility in the XLF took a flyer at the end of the day. Right now, the realized volatility of the XLF is pretty low, at around 10.40, and it would be hard to justify buying any juice on that basis; except there are some big earnings coming, and gamma could play here.
There was pretty big buying volume in the October ATM strike in the XLF. Two key earnings are coming out in JPM and WFC, and some players wanted to get a position on. Why at the end of the day? Well, things sold off slowly from the morning high, and volatility was coming in all around, market wide. Also, the straddle at .31 bid is not very expensive in dollar terms. It really is a flyer on the earnings of two of the biggest, if not the biggest, banks and earnings, and those two most likely will be a bellwether that should carry other financial stocks one way or the other.
Is buying the ATM straddle a bad idea? I think you get the gamma+. What I mean is that good reports (or bad) in the two big banks should reverberate and push the XLF a bit more than normal. That should make for a nice trade by the end of next week.
The Trade
I like owning the XLF ATM straddles (Oct is better), if there is a shot to pick them up close to the closing price of today then ride the sentiment wave good or bad through next week. The high of the year in XLF is 16.44, and it won’t take a whole lot to get back there.
On a day when the VIX came in (again), because none of the news met the junk threshold set for it, the volatility popped in another place. The volatility in the XLF took a flyer at the end of the day. Right now, the realized volatility of the XLF is pretty low, at around 10.40, and it would be hard to justify buying any juice on that basis; except there are some big earnings coming, and gamma could play here.
There was pretty big buying volume in the October ATM strike in the XLF. Two key earnings are coming out in JPM and WFC, and some players wanted to get a position on. Why at the end of the day? Well, things sold off slowly from the morning high, and volatility was coming in all around, market wide. Also, the straddle at .31 bid is not very expensive in dollar terms. It really is a flyer on the earnings of two of the biggest, if not the biggest, banks and earnings, and those two most likely will be a bellwether that should carry other financial stocks one way or the other.
Is buying the ATM straddle a bad idea? I think you get the gamma+. What I mean is that good reports (or bad) in the two big banks should reverberate and push the XLF a bit more than normal. That should make for a nice trade by the end of next week.
The Trade
I like owning the XLF ATM straddles (Oct is better), if there is a shot to pick them up close to the closing price of today then ride the sentiment wave good or bad through next week. The high of the year in XLF is 16.44, and it won’t take a whole lot to get back there.
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