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January 9, 2013  Wed 3:16 AM CT

KBE: SEE CHART GET CHAIN FIND STRATEGIES
One investor is bracing for a pullback in bank stocks now that they are back to a key level from 2011.

optionMONSTER's Depth Charge tracking program detected the purchase of 4,972 February 25 puts on the SPDR S&P Bank Fund for $0.75 yesterday, while an equal number of February 25 calls was sold at the same time for $0.43. There was barely any open interest at either strike before the trade occurred, so this is new activity.

The investor is probably protecting a long position in the KBE or stocks correlated to its index. He or she collected a credit of $0.32 and has now locked in a selling price of $25.32. If it wasn't done against a long position the trader has a highly leveraged short position, with the danger of infinite losses if the stock rises. (See our Education section)

The KBE fell 0.48 percent to $24.85 yesterday but has climbed 13 percent in the last six months. It's outperformed the broader market in that period as investors returned to the beaten-down financial sector.

The exchange-traded fund's current price around $25, however, has been resistance since May 2011. That could be leading some chart watchers to expect that it will struggle to keep climbing or drop.

The bearish trade pushed total option volume in KBE to 5 times greater than average in yesterday's session, according to the Depth Charge.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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