The weekend rescue of troubled lender First Republic Bank (FRC.N) has done little to allay options traders' concerns about the overall health of U.S. regional banks.
The 30-day implied volatility on the SPDR S&P Regional Banking ETF - a measure of expected near-term price swings - was only about two points lower on Monday from the previous week, even after JPMorgan Chase & Co emerged as the winner of the weekend auction for First Republic Bank.
The measure recently stood at 36, well off the high of 82 touched in mid-March when markets were roiled by the twin collapse of lenders Silvergate and Silicon Valley Bank, though much higher than its average reading of 23 for the January-February period.
By comparison, traders appear to be sanguine regarding the outlook for the nation’s biggest banks, which are seen as being less vulnerable to the kinds of ructions that have rocked their regional counterparts.
The 30-day implied volatility for the Financial Select Sector SPDR Fund's (XLF.P), which counts some of the largest U.S. banks among its top holdings, is back to where it was before the first signs of trouble at now-defunct Silvergate and Silicon Valley Bank emerged in early March.
Traders who had bought upside calls on regional banks on Friday appeared to be exiting those positions as the regulator-engineered rescue of First Republic failed to catalyze a rally in the mid-cap bank sector.
"You did have some bullish positioning on Friday," said Chris Murphy, co-head of derivatives strategy at Susquehanna. "I actually think that maybe these call buyers from Friday were looking for a little bit more of a positive reaction," he said.
SPDR S&P Regional Banking ETF shares were down 2% at $41.70 in afternoon trading.
At the individual stock level, traders were focused on regional lender PacWest Bancorp (PACW.O) on Monday. With PacWest shares down 7%, put options, typically used for bearish bets, outnumbered call options, usually employed for bullish bets, 4-to-1, according to Trade Alert data.
