Bullish Bets on U.S. Financial Stocks Increase to 13-Month High

U.S. options traders are making the most bullish wagers on banks in more than a year, speculating financial companies will rally as the economy improves and analysts predict 21 percent profit growth next year.

The ratio of outstanding calls to buy the Financial Select Sector SPDR Fund versus puts to sell rose by a third since October to 1.04 and reached 1.15 on Dec. 6, a 13-month high. The fastest-growing bet is that the ETF tracking 81 lenders and brokers including JPMorgan Chase & Co. and Bank of America Corp. will jump 29 percent to $20 by June. The fund rose 2 cents to $15.50 yesterday, extending this year’s gain to 7.6 percent.

Financial shares posted the second-worst performance among 10 industry groups in the Standard & Poor’s 500 Index over the past six months as concern about the European debt crisis and the sustainability of the U.S. economic recovery stymied gains. They have gained 7.2 percent in December, the most of the 10 industries, after companies reported higher-than-estimated third-quarter earnings and the Federal Reserve announced a second round of Treasury purchases to spur growth.

“People in the options market are betting heavily that these stocks will go up,” said Chris Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago. “I’m seeing a lot of smart-money guys buying out-of- the-money calls in banks. When I see everyone marching in the same direction at the same time, that’s something I take note of. It’s a strong signal.”

Loans, Rates

Goldman Sachs Group Inc., based in New York, raised its rating on financial stocks to “overweight” from “neutral” on Dec. 1, saying stock gains will be driven by loan demand and improving net interest rates as well as the return of cash to shareholders through dividends and buybacks. The firm’s economists increased their forecasts for U.S. and global growth in 2011 and predicted an acceleration in 2012.

“Financials provide attractive upside to an improving growth outlook at reasonable valuation,” strategist David Kostin wrote in the report. “Stronger economic growth and a more supportive interest rate environment are positive for both loan demand and pricing.”

The cost of options on the ETF has tumbled to the lowest level since April. Implied volatility, the key gauge of option prices, for at-the-money options expiring in 30 days fell to 20.96 yesterday, down by more than half since this year’s peak of 46.46 in May, according to data compiled by Bloomberg.

Bullish Contracts

Total open interest for calls on the financials ETF has climbed 13 percent since the last options expiration a month ago to 3.54 million, compared with 3.39 million puts -- and the number has been higher for calls for the past three weeks.

The open interest for the fastest-growing bets, June $20 calls, has jumped to 252,516 contracts from zero at the end of October, according to data compiled by Bloomberg. The next biggest gain was for January $16 calls, which rose to 384,796 from 148,977 in October, followed by the December $16 calls, which increased to 355,767.

Charlotte, North Carolina-based Bank of America, the worst performer in the Dow Jones Industrial Average over the past six months, has rallied 14 percent since falling to an 18-month low on Nov. 30. That is the second-biggest gain this month among the 30 Dow companies and almost triple the S&P 500’s performance during the same period.

Fee Caps

The prospect of increased regulation could hold back the shares. San Francisco-based Visa Inc. and MasterCard Inc. in Purchase, New York, owners of the world’s two biggest payment networks, plunged more than 10 percent yesterday in U.S. stock trading after the Federal Reserve Board proposed rules that could slash debit-card interchange fees by 90 percent. Financial shares sank in January after President Barack Obama proposed a financial-industry overhaul.

Financial companies may be worth buying again after they increased share repurchases and boosted payouts to owners, according to Jeff Saut, who helps manage $240 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Florida.

The Fed issued guidelines last month for supervisors to use in assessing whether banks are strong enough to boost dividends and buy back shares. Comerica Inc., the Dallas-based bank that posted annual profits throughout the financial crisis, increased its quarterly payout to 10 cents a share on Nov. 16. Comerica also authorized the repurchase of as much as 7 percent of stock outstanding.

Howard Atkins, the chief financial officer of San Francisco-based Wells Fargo & Co., said in October that a dividend increase is a “top priority” for the bank. JPMorgan Chief Executive Officer Jamie Dimon said he was “reasonably hopeful” the New York-based bank will be able to raise its payment in the first quarter of 2011 and that regulators were open to the idea.

“There will be a turnaround in banks,” said Harvey Neiman, who oversees $22 million including options strategies as president of Neiman Funds in Rancho Santa Fe, California. “The reduction of debt and the stabilization of the whole mortgage industry will drive it.”

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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