Wednesday, August 25, 2010

Regional Banking ETF (KRE) - Vol Buyer in Oct; Bearish Bet in Sep

KRE (Regional Banking ETF) is trading $20.98, down 1.6% today with IV30™ spiking up 10.5%. The LIVEVOL™ Pro Summary is below.

The ETF has traded over 9,700 options on total daily average option volume of just 3,047. The most interesting trade to me is an Oct 21 straddle purchase 1,700x . The Stats Tab and Day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab (click to enlarge) illustrates that both the calls and the puts are mostly opening (compare OI to trade size). I've also highlighted the OI in three lines in Dec. A huge Dec 19/23 put spread purchase funded by Dec 26 call sale went up 7-29-2010. The straddle purchase today and put spread purchase in July are both bets on a vol jump and a down move in the ETF.

The IV30™ was up 5.3% yesterday. Add that to the climb today and we're looking at over 15% short term vol jump in two days. Note that the banking stocks can be very sensitive to market sentiment; particularly negative sentiment.

The Skew Tab snap (click to enlarge) illustrates the vols by strike by month.

We can see the ATM vols for Oct (yellow) and Dec (green) lie on top of each other. Sep is just a bit below.

Finally, the Charts Tab (6 months) is below (click to enlarge). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue). The yellow shaded area at the very bottom is the IV30™ vs. the HV20™ vol difference.

Note first how the ETF price has declined of late. The 52 wk. high is $29.79. More impressive is the vol jump of late. Just last week the IV30™ was 33; it's up more than 20% since.

Possible Trades
If you're bearish but want to sell the elevated IV30™, a Sep 20/19 1 x 2 put spread for even looks decent. Maybe purchase 1 Sep 17 put for $0.07 if that's cheaper than carrying the margin.

A little more bearish but more expensive is a Sep 21 put purchase against 2 Sep 19 put sales for a net debit of $0.45. Again, buying a cheap put on the downside may be less expensive than carrying the margin.

Contrarian Trades: Sell straddles

This is trade analysis, not a recommendation.

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