KRE Gets 'Most Unusual Option Trade' Award

KRE Unusual Option Activity Report

During my daily classes on TheoTrade, I’ve been discussing the bullish option activity in regional banks for several weeks. Before the recent rally got started, there were several unusual option trades which were pointing to a bullish move.

If you missed it, check out this post today discussing some of the bullish dynamics brewing in regional banks.

With stimulus and willing Federal Reserve to monetize virtually everything, it makes sense that lending institutions would fair better with a steeper yield curve. However, that is not a foregone conclusion without even more draconian measures from the Federal Reserve.

It is with this backdrop that I present SPDR S&P Regional Banking ETF (NYSEARCA: KRE) with the Most Unusual Trade of the Week!

KRE Option Activity

The option activity on the regional bank ETF was sizzling today. At over double the average, it showed increased interest in the opportunity in this industry. Nearly 62% of call option volume occurred between the market and 40% of the put option volume was filled at the ask. On the surface, you may walk away with a bearish impression with the put volume outpacing call volume.

This is where looking for large block activity can be important. Viewing time and sales data for Large block trades is helpful at finding unusual trades. It will also help you identify potential spread trades. Here is an overview of two large, four-legged option trades made on KRE today.

  • 6,000 18 JUN 21 $43 call BOT @ $4.29 to $4.34
  • 12,000 18 JUN 21 $49 call sold @ $2.15 to $2.17
  • 6,000 18 JUN 21 $42 put sold @ $5.10 to $5.11
  • 12,000 18 JUN 21 34 put BOT @ $1.99 to $2.00

It is unusual to see a trade that combines two ratio backspreads like this. Recently, it’s been more common to see large trades where the ratio back spread buys the closer strike and sell more further OTM strike. However, this trade combines both varieties.

A quick look at the skewed volatility term structure for the June 2021 expiration doesn’t really support a trade like this. This indicates that the price outlook was a bigger consideration than volatility. Let’s take a closer look at the risk profile to understand these expectations.  

KRE Risk Profile

Looking at the risk profile for the KRE trade you’ll notice that it has three breakeven prices at expiration. The first is near the current stock price and the other two are structured around the one standard deviation range (gray shaded area) for the price based on the June expiration.

The green triangle wave at expiration reflects the desire to see a smaller move higher or a large move lower. The upper breakeven is around $56.50, which happens to be near the mid-February high. The lower breakeven near $27.50 aligns with the March low. The middle breakeven price aligns with the resistance near $40.50. That resistance was broken on Thursday on above average volume.

The purple sine wave represents the current P/L if the price were to move as of today. The current P/L line will maintain a similar shape for a while given the trade was made for a June expiration. The trade will generally benefit by a decline in the share price of KRE until the end of January. At that point, it will start to take on the form of its P/L at expiration.

Conclusion

While there is a smaller bullish case to be made from this trade, the tenor of it is more about near-term uncertainty. Financials and regional banks have had a nice run and it very well may continue. The delay if Federal stimulus and the lack of a winner November 3 may create some potential for risk following the election. This trade appears to attempt to play both possibilities.

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