Source: Jin10 Data
With the expectations of a rate cut by the Federal Reserve heating up, the performance of financial stocks has begun to attract the attention of investors.
Financial stocks were once not favored by many investors, but this situation seems to be changing.
The layout of the options market and recent performance in the stock market indicate that aggressive investors are getting ready for significant returns.
This optimism seems to be based on expectations that the Federal Reserve will cut interest rates as early as September. Rate cuts could stimulate profit-making activities for banks and inject new vitality into the real estate industry.
The recent outstanding performance of the financial sector has not garnered much attention, as commentators are overly focused on popular topics such as AI, interest rate cuts, and Warren Buffett's decision to cash in on some key holdings.
Warren Buffett recently reduced his holdings in $Bank of America (BAC.US)$ The huge investment has brought negative impact to the sentiment of this industry. Buffett is believed to have an extraordinary understanding of banks and brokers, and almost no one is willing to trade against him. However, $Financial Select Sector SPDR Fund (XLF.US)$ has risen by about 13% since mid-April, outperforming$S&P 500 Index (.SPX.US)$about 12% increase.
The stock chart of XLF indicates that the interest-rate-sensitive financial sector has just broken through historical resistance levels. If XLF's moderate breakthrough is further strengthened, XLF will trade significantly at historical highs.
Since mid-July, XLF has attempted—and failed—to break through the $44 level twice. The third breakthrough of $44 occurred after Federal Reserve Chairman Jerome Powell's dovish speech at Jackson Hole, which restored optimism and seemed to put XLF in a wait-and-see mode for the sector's next major catalyst: the conclusion of the Federal Reserve's two-day rate-setting committee meeting on September 18.
To prepare for the breakthrough of XLF, aggressive investors can consider a risk reversal strategy. This involves selling a put option and buying a call option with a higher strike price but the same expiration date. This strategy allows investors to buy XLF on a pullback while participating in any upside.
At $44.80 per share of XLF, investors can sell the December $41 put option and buy the December $48 call option. If the stock price reaches $55, the call option will be worth $7. If the stock price falls below $41 at expiration, the investor must buy XLF at the strike price of $41 or adjust the put option to avoid being assigned. In the past 52 weeks, the price of XLF has fluctuated between $31.36 and $44.82.
Choosing a December expiration allows for capturing the September, November, and December Federal Reserve meetings. This expiration date also provides time for banks and real estate companies to communicate business changes due to interest rate cuts.
The options market is buzzing with bullish trades in the financial and real estate sectors, with expectations of a resurgence. These trades could be profitable if rate cuts drive mortgage applications and refinancing.
Recently, Susquehanna Financial Group advised a client who bought 5,000 March-expiring XLF $49 call options for a price of 54 cents.
Another investor bought 5000 November-expiring real estate services company options at a price of 40 cents each.$Cushman & Wakefield (CWK.US)$15-dollar call options on Cushman & Wakefield (CWK.US) are likely related to the company's financial reports. The stock is currently priced around 13 dollars. This transaction is significant as the average daily trading volume of Cushman & Wakefield is approximately 96 contracts.
Meanwhile, Susquehanna advised a client who closed out 10,000 September-expiring iShares U.S. Real Estate ETF $98 call options for approximately $2 and purchased 14,000 September-expiring $100 call options for a price of $1.05.
Putting all these pieces together, it means that money flows to the lowest point. If the Federal Reserve reduces interest rates, the financial sector may emerge in a bullish manner, serving as a low-water mark for the market.
Is the US expected to cut interest rates? Interest rate-sensitive long bonds, small-value stocks, biotech stocks and other assets have benefited from the rebound, and savvy investors who have deployed early have already gained profits! If you are still unsure about which assets to allocate during an interest rate cut cycle? How to allocate?Take a look at the "Interest Rate Investment Lazy Pack" course, which comes with the most comprehensive guide >>.
Editor / jayden