Bearish Bank Option Trades Jump as Congress Debates Financial Regulation

Trading of bearish options on U.S. banks and brokers jumped to 2.4 times the four-week average as U.S. lawmakers negotiated the final terms of the financial industry regulatory overhaul.

Almost 440,000 puts to sell the Financial Select Sector SPDR exchange-traded fund changed hands as of 11 a.m. in New York, 22 times the number of calls giving the right to buy. The ETF tracking 79 companies fell 1.7 percent to $14.27 as all but two members retreated.

The most-active contracts were August $13 puts, which rose 41 percent to 38 cents and accounted for about a third of all options trading. The ETF hasn’t closed below $13 since July.

Some analysts have expressed concern that changes to the bill, including a prohibition on banks trading derivatives, have become too onerous in recent weeks.

“It goes too far,” Brian Gardner, a former congressional staffer who is now a Washington analyst for Keefe, Bruyette & Woods Inc., said in an interview today with Bloomberg Television. “It’s starting to really cross over, quite clearly, not into the area of financial regulatory reform but into punishment of Wall Street.”

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net