2 Hot Financial Stocks with Room to Run – Schaeffers Research (blog)

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Financial and bank stocks continue to surge higher thanks to hawkish comments from Fed Chair Janet Yellen yesterday. These gains are illustrated by the ascent of exchange-traded funds (ETF) Financial Select Sector SPDR Fund (XLF) and SPDR S&P Bank ETF (KBE). Both are up over 1% today, with XLF tapping a nine-year high of $25.71 earlier. Two stocks enjoying an upside move today are Morgan Stanley (NYSE:MS) and BlackRock, Inc. (NYSE:BLK). Below, we’ll take a closer look at how options traders have been playing MS and BLK. 

What’s notable about these two names, is that they’ve both seen bearish trading trends in the options pits. Starting with MS, it has a 10-day put/call volume ratio of 1.39, showing put buying has outpaced call buying during the past two weeks. This ratio ranks in the 86th annual percentile, showing this type of put bias is quite unusual. 

Over this time frame, the weekly 10/6 42-strike put so one of the largest increases in open interest. Data from the major options exchanges shows a mix of buying and selling at this strike. So, while some options traders expect Morgan Stanley stock to fall below $42 in the next couple weeks, put writers expect this level to serve as support. But considering how far out of the money this is — the shares have traded below $42 since early June — those buying the contracts could be shareholders hedging their positions. 

They have good reason to hedge, too. That is, the security has rallied nearly 53% over the past 12 months, touching a nine-year high of $48.89 on Aug. 8, and was last seen at $47.84. Still, there’s room for bullish analyst attention to come through and help the shares go even higher, since half those in coverage have handed out “hold” or “strong sell” ratings. It also helps that Morgan Stanley has historically been one of the best stocks to own in October, averaging a 3.9% gain for the period over the past 10 years. 

Meanwhile, BLK has a 10-day put/call volume ratio of 4.40 at across the ISE, CBOE, and PHLX, which is only 4 percentage points from an annual high. As a result, put open interest now resides in the 80th percentile of its annual range. 

However, there’s a good chance this was driven by mostly hedging activity. That’s because some of the largest increases in open interest have occurred at far out-of-the-money strikes, such as the November 390 and 400 puts, and the October 400 put. Either way, it’s seemingly a good time to buy short-term options, since BLK’s Schaeffer’s Volatility Index (SVI) of 20% ranks in the bottom one-third of readings from the past year, pointing to unusually low volatility expectations at the moment. 

BlackRock stock is also entering a historically bullish period. For example, the equity has historically outperformed in the fourth quarter, averaging a gain of 3.6% over the past 10 years, closing higher 80% of the time. Year-over-year, BLK has added 20.1% to trade at $435, and on July 14 hit a record high of $442.83. 

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