Michael Shulman

The Best Way to Trade the Banks in Early 2009

by Michael Shulman   12/24/08

Options are not just a way to make money -- they are also indicators of sentiment.

Take a look at the July 2009 put and call options on the double inverse exchange-traded fund (ETF) on the Dow Jones Financial Index, the UltraShort Financials ProShares (SKF).

Nothing in the options market reflects the positive or negative opinion about a market segment better than a call or put on a double inverse ETF.

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The January call buyers see a 5.5% or so decline in the index, while the put buyers see an 8% rise. The buyers of April calls see a more than 13% fall in the index, and the put buyers are betting on an 18% rise.

I see this pricing as an indication that the market is split -- the difference between the two positions is not all that great. So, it is time to look at fundamentals and see how January earnings -- and beyond -- could dictate the winners or losers in this trade.

Looking at fundamentals, the banks are, to use a technical term, a mess. And they will get a lot messier in 2009.