Analysis – With bank results in print, options traders brace for volatility

Citi bank ATMs are seen in New York City, USA, on March 17, 2020.

Options traders are bracing for volatility in U.S. bank stocks days ahead of an earnings season many believe will bring lower profits and reflect worries about an expected recession.

Current market positioning signals gloomy outlook: One-month moving average of open positions on the Financial Select Sector SPDR Fund, the largest financial ETF with nearly $33 billion in assets, outnumbers calls 1.8-to-1, the most defensive this the measure has been in place since the end of October.

An unprecedented trade on Monday saw a put buyer pay $1.5 million for 50,000 February puts on XLF. The trade would have been profitable if the ETF’s shares fell below $33 in mid-February, down 6% from today’s levels.

“What you’re seeing in the markets is some concern about whether the operating environment is going to be favorable for the financial sector,” said Scott Knapp, market strategist at CUNA Mutual Group. “It’s a challenging environment where it’s tough to make a nickel … the markets move forward by reducing some of that.”

Bank of America, JPMorgan Chase & Co., Wells Fargo and Citigroup Inc are due to report results on Friday, with other lenders to follow next week.

Shares in banks have been joined by broader markets over the past year as the Federal Reserve raised interest rates at a rapid clip to combat the worst inflation in decades. The S&P 500 banking index fell 21.6% last year, compared with a 19.4% decline for the S&P 500 as a whole.

Bank stocks have historically been volatile around earnings time, and traders expect Thursday’s US consumer price data – which has set off big market swings in recent months – to add an extra dose of choppiness this time around.

Options on major bank stocks averaged the biggest moves by earnings over the past two years, an analysis by Susquehanna International Group showed.

“The bias in options action heading into big bank earnings has been to buy volatility and protect positions,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “It’s definitely more pronounced than it has been historically.”

GRAPHIC: Prepared for volatility (



Many believe rising prices and higher borrowing will take a toll on lenders’ bottom lines by causing consumers and businesses to curb their spending. Since banks act as financial intermediaries, their profits fall when activity slows down.

Analysts expect earnings from the S&P 500 financials sector to have fallen 8.7% in the fourth quarter from a year ago, tied with the technology sector as the fourth-biggest projected decliner among major sectors for the period, according to IBES data from Refinitiv.

Meanwhile, Goldman Sachs Group will begin cutting thousands of jobs across the firm from Wednesday as it braces for a tough economic environment, the latest among major banks including Morgan Stanley and Citigroup Inc to cut their workforce in recent months as a The deal-making boom on Wall Street sparked in part because of high interest rates.

Not everyone has a gloomy outlook for the sector. In a research note Monday, Bank of America said the financial sector has better earnings stability than the S&P 500, cleaner balance sheet and less recession risk than “other more crowded and expensive cyclical sectors like Info Tech.”

“US financials can be a good place to park assets in the short term,” wrote Savita Subramanian, equity and quant strategist for BofA Global Research.

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