Options Activity Points to Further Pullback in Financials

A fresh triple-digit decline on Thursday for the Dow Jones Industrial Average followed pained existing-home sales data that has the market still grappling in the dark for that "last rung lower" in the housing decline.

Financial stocks are leading the pack of decliners today, with sharply elevated put volumes in a number of major financial components showing traders bracing for new movement lower in the financials but delineating clearer downside targets through the use of put spreads. Citigroup (C - commentary - Cramer's Take) shares are down 4.7% at $20.11 as we register more than 200,000 lots trading with an edge to puts by a factor of 1.7.

Early notable trades included what looked like a 10,000-lot long put spread in the December contract between strikes $12.50 and $17.50. The position here would take about a 93-cent credit from the buyer, implying at least a 17% downside move between now and December, putting a bottom to the downside at that short $12.50 strike.

Shares in Bank of America (BAC - commentary - Cramer's Take) declined 1.2% to $33.04 as option traders loaded up on a 16,000-lot put spread position in the August contract between the strikes $27.50 and $32.50. Here it looks like a standard long position bought for about a $1.40 debit, implying that the trader wants to see at least another 5% off current levels but doesn't portend a drop below $27.50.

Another 20,000-lot long put spread went through in the November contract between strikes $17.50 and $30, with the trader buying the higher strike for about $3.10 and selling the lower for about 50 cents. The $2.60 debit requires at least another 15% to the downside for Bank of America shares by Nov. 21, but, again, there's a basement level built into the trade.

Reading the Action

The takeaway from these trades is twofold. The jaded pessimists among us would view it as an indication of continued "grind lower" in financials heading into the fall, a return of the Sisyphean tendency that has gripped the space for months now. Some might take comfort in the fact that so many traders are bracing for pullbacks with very resolute downside limits in the near future, keeping shares above the July 15 low of $18.52 for the remainder of August, with deeper downside possible into the fall.

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At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is an equity options analyst for Interactive Brokers in Greenwich, Conn., and is the author of its daily "Options and Futures Intelligence Report." Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." She also appears on BNN Canada and has been a guest on Fox News' "Your World With Neil Cavuto."

Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.