US options traders bet on near-term recovery as bank stocks rebound

© Reuters. A screen displays the logo and trading info for Western Alliance Bancorporation on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 14, 2023. REUTERS/Brendan McDermid

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -Traders in the U.S. equity options market on Tuesday were betting on a near-term rebound in the battered shares of U.S. banks after the high-profile collapse of Silicon Valley Bank triggered a sector-wide selloff.

Options traders were buying up short-term call options on a variety of names, including the SPDR S&P regional banking ETF and regional banks such as First Republic Bank (NYSE:FRC) and Western Alliance (NYSE:WAL) Bancorp.

U.S. bank stocks jumped on Tuesday, recovering some ground after the failure of Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) triggered heavy selling by investors who were already anxious about the impact of rising interest rates on lenders. Traders now appeared to be speculating that the worst of the selloff was over.

"It's early days here but … there is some stability returning in bank share price action," said Michael Purves, chief executive of Tallbacken Capital. "The idea of a systemic contagion seems to be disappearing."

With SPDR S&P Regional Banking (NYSE:KRE) ETF's shares up 2% on the day, its options volume was at 224,000 contracts, with calls outnumbering puts 1.13-to-1, compared with 0.89-to-1 on Monday. Calls convey the right to buy shares at a fixed price in the future and are typically employed to express bullish sentiment, while puts offer the right to sell shares at a set price in the future and usually express bearish bias.

"Risk-on appears to be the flavor for regional banks today," said Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories. Bullish speculation was particularly heavy in options expiring in less than a week, while longer-dated options saw less interest, he said.

Traders were also upbeat on the prospects for larger banks that had been swept up in the recent selloff. The broader Financial Select Sector SPDR Fund and some larger banks, including JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup Inc (NYSE:C), drew bullish options activity on Tuesday. "Judging from the listed options volume in XLF and the biggest banks, there seems to be a strong bias toward the upside," Stefano Pascale, Barclays (LON:BARC) head of U.S. equity derivatives research, said.

U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system, and President Joe Biden on Monday vowed to take action to ensure its safety.

Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, noted that Tuesday's options activity was a mix of traders taking profits on exiting hedges and some call buying, with next week's Federal Reserve policy meeting keeping traders from abandoning all caution.

"I think the upcoming Fed decision is still a big overhang for folks," she said. Still, with some calm returning on Tuesday, options traders' dialed back expectations for more near-term fireworks from the sector. The 30-day implied volatility for XLF - a gauge of how much the ETF's shares are expected to gyrate in coming days - fell to 28%, down from a one-year high of 36% touched in the previous session. "The volatility spike that we saw the other day was one for the record books and that in my mind needed to be faded," said Purves.