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Bank stocks have rallied in recent weeks, but a pick-up in hedging on a key financial sector exchange-traded fund may be a sign that investors are wary of earnings season volatility, options market experts said.

With big banks like JP Morgan, Wells Fargo and Citigroup Inc set to kick off earnings season on Friday, the one-month moving average of open put options on the Financial Select Sector SPDR Fund outnumbers open calls by a factor of nearly 1.9.

That’s the most bearish ratio for the $48 billion financial ETF ahead of quarterly results since banks reported earnings for the first quarter of 2020, a Reuters analysis of Trade Alert data showed. Put options are typically used to protect against price declines, while calls are often used to bet on price gains.

Expectations of higher yields and new lending, as well as a shift from growth stocks to economically-sensitive, comparatively cheap names, have driven the S&P 500 Financials sector up 5.05% through Monday, its best start to the year since 2012.

The bearish options positioning likely reflects investors protecting profits in the sector. Some of the larger bank stocks have been notoriously volatile around earnings season, said Ilya Feygin, senior strategist at WallachBeth Capital.

JPMorgan shares, for instance, have slipped for five straight quarters on the day it reported results. Shares of Citi and Wells Fargo have declined on earnings day in 6 of the last 8 quarters.

“I really don’t like being long this stuff into earnings. It presents a lot of downside gap risk,” Feygin said.

The relative rise in put options comes on the heels of big inflows into the sector.

The XLF fund drew $2.15 billion dollars in December, its best month since May, helping lift 2021′s net inflows to a record $9.64 billion. The fund rose 32% last year - same as the S&P banks index - compared with the S&P 500 Index’s 27% rise.

Broadly speaking, the picture for bank results is likely to be positive and analysts anticipate executives will sound an optimistic note on the outlook for core earnings.

“The rally in financials makes a lot of sense because banks that make their money in corporate or mortgage lending benefit from a steeper yield curve, while those banks and brokers with clearing operations benefit from higher short term rates,” said Steve Sosnick, chief strategist at Interactive Brokers.

“We’ve gotten both, but the speed of the move inspires some suspicion, and thus the hedging,” he said.

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