March 31 (Bloomberg) -- Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said.
âDespite the rally, credit and option markets are pricing in increased downside risk,â New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.
He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.
The difference between prices for bullish and bearish options, known to options traders as âskew,â and prices for credit-default swaps, which are used to protect against a default on a companyâs debt, both show that investors expect the XLF to reverse gains, the strategist wrote.
Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETFâs share price is rising.
âThis is an interesting reversal,â Wang wrote. âThe higher the spread is, the more premium investors are placing on downside protection.â
The XLF hasnât closed below $8 since March 11. The basket of shares is still down 30 percent this year.
Options are derivatives that give the right to buy or sell a security at a set price and date. Puts give the right to sell and calls convey the right to buy. Credit-default swaps, used to hedge against losses or to speculate on a companyâs ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2dV4cMcTXEU
This "recommendation" is to be interpreted as a strong buy order...
âDespite the rally, credit and option markets are pricing in increased downside risk,â New York-based Citigroup strategist Alvin Wang wrote in a note sent to clients today.
He recommended puts giving the right to sell the Financial Select Sector SPDR Fund, an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15. The XLF, as the ETF is known, added 5.5 percent to $8.81 in New York, bringing its gain since March 6 to 43 percent. The May $8 puts fell 25 percent to 70 cents today.
The difference between prices for bullish and bearish options, known to options traders as âskew,â and prices for credit-default swaps, which are used to protect against a default on a companyâs debt, both show that investors expect the XLF to reverse gains, the strategist wrote.
Put prices rose 35 percent relative to call prices this month, even as the XLF added almost 10 percent before today, the strategist said. That means investors are paying more to use options as protection against a decline at the same time as the ETFâs share price is rising.
âThis is an interesting reversal,â Wang wrote. âThe higher the spread is, the more premium investors are placing on downside protection.â
The XLF hasnât closed below $8 since March 11. The basket of shares is still down 30 percent this year.
Options are derivatives that give the right to buy or sell a security at a set price and date. Puts give the right to sell and calls convey the right to buy. Credit-default swaps, used to hedge against losses or to speculate on a companyâs ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2dV4cMcTXEU
This "recommendation" is to be interpreted as a strong buy order...
