Bank Stocks May be on Sale, but be Careful Before Going Long Options

Tom Gentile

Posted in
Daily Report

By: Tom Gentile
March 16th, 2023

3 mins read

By now, you all have likely heard of and seen the banking crisis going on and the major sell off going on in financial stocks.

It may be more isolated to the regional banks versus the major banks, but almost every security in the financial sector family is getting hit.

The ETF that tracks the regional banks is the KRE.  It is the SPDR S&P Regional Bank ETF and if you take a look at this chart you can see the damage being done.

Figure 1: 120-day Candle Chart on KRE
Figure 1: 120-day Candle Chart on KRE

You can look at many other stocks in the same sector and see a similar chart.

The question now is have we seen a bottom in these stocks.  Keep in mind even if a bottom is put in or is starting to be put in, these stocks can hover down here at their current lows and just meander sideways until conviction from financial market bulls steps in and start buying.

Should a bottom take hold and buying comes back to the level to start pushing these higher in price we will look for reversal patterns to indicate that.

Regional Bank Rescue Plans

The bank First Republic is the possible beneficiary of larger banks stepping in to deposit $30 billion in it.

This seemed to be a vote of confidence for things if not getting better at least helping out and this type news is being attributed to the reason the market turned higher, seeing the Dow popping up 370+ points on the day.

Credit Suisse another bank stock getting beat up made the announcement they will borrow up to nearly $54 billion from the Swiss National Bank to assure short-term liquidity.

There may be more situations like this coming down the pipe, but until then things are still going to be tenuous for the sector.  Today, though, this news helped the KRE move up 3-3.5% or more on the day.

Be Careful Getting Back in to Financial Sector Securities

Below is the Morning Report List of stocks or ETF’s whose options are deemed Expensive.

Figure 2: Expensive IV Options
Figure 2: Expensive IV Options

8 of the top 10 securities with Expensive IV are those from the financial services sector.

When you compare their current Implied Volatility (IV) to that of their High (over the past 52 week range), you will see they are all at or near their high.  Meaning the options are more expensive than normal.

They may be enticing due to their share prices looking to be on sale, but to go long options you risk the IV getting crushed or sucked out of the option premium and that can cause a reduction in price and end up trading lower than your option purchase price despite what the share price does.

We would rather lie low and wait for the IV to come out of these before considering going long.  The prices have already pulled back, let’s now wait for the IV to do the same before considering taking action.

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