After breaking out above the Dec thru June downtrend, the main regional bank etf (KRE) pulled back by ~ 10% from the recent highs before stabilizing the past few days. The decline in the regional banks also moved the KRE/SPY relative spread to just above the lows it made in both April and June. What is interesting is that off these relative lows we not only saw KRE outperform, but it did so while rallying sharply both times. When the KRE/SPY spread rallied by 10% off the April lows to the May highs, KRE gained as much as 27%. In the June thru July period when KRE outperformed SPY by more than 9%, KRE climbed by as much as 15% as well. I believe the current pullback and underperformance to the market has created yet another attractive opportunity to play for a move back higher in the regional banks.
Even though we have now had several sharp moves in KRE over the past few months (both higher and lower), implied volatility for KRE 2-month calls remains rather subdued. In fact, it now trades back near the 6-month lows. What is also particularly interesting about owning KRE Sept vol (calls) here is that there are two potentially bullish catalysts that the September expiration will capture. The first catalyst could be the Barclays Global Financial Services conference the week of Sept 8th, where several of the top regional banks will be presenting and then the second potential catalyst will be the FOMC meeting/rate cut? on Sept 17th. These two events should also likely keep a bid to vol here in KRE, especially as we get closer to both.
Trade:
Buy KRE Sept 62 calls for ~ $1.40 (KRE $59.85 stock ref)
Trade Details:
- Buying the September 3.6% (37-delta) upside calls following recent pullback and relative underperformance by the regional banks to the overall market
- Have seen KRE move back sharply higher on both an absolute, and relative, basis the last two times we saw the KRE/SPY relationship back at these levels
- Two potentially positive catalysts in September for the group (Barclays conference and FOMC meeting) – KRE September calls will capture both events
- KRE 2-month call vol back to the 6-month lows – great time to be adding limited-risk upsides
- Trade can be added to an existing long exposure position in the group, or as a limited-risk way to add exposure
- Please contact me or the 22V sales desk for updated pricing and execution capabilities
KRE chart – breakout above the Dec-June downtrend with a re-test of the breakout level
KRE/SPY relative spread pulled back to near the recent lows. Have seen KRE outperform sharply while rallying both times off this level
KRE 2-month (Sept) 40-delta call implied vol just above the 6-month lows
