Saqib Iqbal Ahmad

NEW YORK, (Reuters) – Bank stocks are up in the last week, but hedging activity on a major financial sector fund exchange-traded fund could indicate that investors are concerned about earnings season volatility. Options market experts suggested this.

JP Morgan is one of the largest banks in America. Wells Fargo (NYSE: Citigroup Inc (NYSE:), will launch earnings season this Friday. On Friday, the moving average over the past month of open put options on Financial Select Sector SPDR Fund is nearly 1.9.

This is the worst ratio of the $48billion financial ETF since quarterly earnings were reported by banks in the first quarter 2020. A Reuters analysis of Trade Alert data revealed that this was the case. Put options can be used to hedge against price falls, while calls may be used to speculate on price rises.

Expectations of higher yields and new lending, as well as a shift from growth stocks to economically-sensitive, comparatively cheap names, have driven the sector up 5.05% through Monday, its best start to the year since 2012.

This bearish option positioning is likely to reflect investors protecting sector profits. WallachBeth Capital senior strategist Ilya Feygin said that some of the largest bank stocks are notoriously volatile during earnings season.

JPMorgan (NYSE) shares have fallen for five quarters straight on the same day as it released results. The earnings day shares of Citi and Wells Fargo has seen a decline in six of the eight quarters.

I don’t enjoy being long on this stuff in earnings. “It presents a lot risk in the downside,” Feygin explained.

This is due to large sector inflows.

In December the XLF fund drew $2.15 Billion dollars, which was its highest month since May. This helped to increase 2021’s net flows to a record $9.64 Billion. The fund rose 32% last year – same as the S&P banks index – compared with the ‘s 27% rise.

The outlook for bank earnings is positive, and analysts expect that executives will be optimistic about the prospects for core earnings.

According to Steve Sosnick (NASDAQ: Chief Strategist at Interactive Brokers), “The rally is in financials makes sense because banks making their money in corporate lending or mortgage lending profit from a steeper yield curve while brokers and banks with clearing operations benefit by higher short-term rates.”

“We’ve got both, but we have gotten some suspicious, so there is the hedging.”