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Henry Schwartz Analysis: Are the Financials Ready To Falter?

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SPDR Financials (XLF) is down over the past two days after notching new multi-year highs Thursday. XLF, which holds all of the financial names from the S&P, lost 8 cents to $18.47 Friday in the wake of uninspiring earnings reports from JP Morgan (JPM) and Wells Fargo (WFC), Shares are down $0.03 to $18.44 Monday morning after Citigroup (C) released its latest profit report. The modest two-day decline comes after a 13.2% year-to-date rally pushed XLF to its best levels since before the financial crisis. In options action, trading was very brisk in XLF Friday and sentient was decidedly cautious, as some players seem to be bracing for additional losses in XLF in the days/weeks ahead.

The largest blocks of options traded across the entire market Friday were in the XLF. In morning action, with shares around $18.45, one investor bought a 100,000-contract block of XLF April 18 puts for $0.06 per contract. Today's open interest numbers indicate a new position was opened. If so, it's a very short-term trade. April options expire at the end of this week and the 18 strike is 2.5% out-of-the-money. Nearly 200,000 contracts traded  Friday, making XLF April 18 puts the day's most active.

Separately, June 17 and 18 puts on XLF saw a flurry of activity and were the next most actives across the options market Friday. 135,000 of the June 18 puts changed hands and 133,220 June 17s also traded on the day. The top trades included a spread, in which the investor apparently bought 62,000 Jun 18 puts on XLF for $0.39 and sold 62,000 Jun 17 puts at $0.15. The spread, for $0.24, appears to be a roll up in strike prices -- as the investor covered a position in the 17s, while opening a new block of puts at the 18 strike.

Interest in April and June 18 puts reflects the increased investor anxiety about the short-term outlook for the equity market and the financial sector. While JPM, WFC, and Citi have already reported, the earnings calendar is chock full of earnings releases this week, including Goldman Sachs (GS), Morgan Stanley (MS) and American Express (AXP). The options order flow indicates that some "smart money" players are hedging their bets ahead of the results and are bracing for an uptick in volatility in the days/weeks ahead. Indeed, trading in XLF was very impressive Friday after more than a half million puts and 105,000 calls traded on the ETF.

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