Moody’s warning revisited as a wake-up call for optimistic banking investors

The decline in US bank stocks this week astonished options traders and drove them to wonder whether bank investors have grown too accustomed to the crisis-hit industry. Several US regional lenders had their credit ratings reduced by Moody’s, and some of the world’s largest banks were under scrutiny for a possible downgrading. The agency warned lenders that as long as interest rates stay high, funding costs rise, and a potential recession looms, it will be more difficult for them to turn a profit.

Additionally mentioned as a risk was some lenders’ exposure to commercial real estate. The SPDR S&P Regional Banking ETF and two other key sector exchange-traded funds’ near-term swing expectations touched their lowest level the day before, the lowest level since Silicon Valley Bank’s demise in March, indicating little investor anxiety about the industry’s prognosis.

The 30-day implied volatility for SPDR S&P Regional Banking ETF (30.7%) increased from the 28.9% reached on Monday to 31.1%. At 30.7% as of late Wednesday, that indicator of how much market participants anticipate the shares to fluctuate is still well below the peak of 82% reached in March. Investors did not prioritize defensive posture and appeared to have made peace with the sector’s concerns.

Positioning is less defensive than it has been about 80% of the time over the last four years with roughly 1.5 put options open for every call option. This is a far cry from March when there were more than 4 puts open for every call option. The S&P 500 Banks index is down roughly 3% for the year, while the S&P 500 Index has increased by 17%. This is more of a warning shot for investors who are becoming complacent in this market.

With around 1.5 put options open for every call option, positioning is less defensive than it has been for 80% of the time during the previous four years. Compared to March, when there were more than 4 open puts for every call option, this is a significant change. While the S&P 500 Index has grown by 17%, the S&P 500 Banks index is down by 3% for the year. This should serve as more of a caution to investors who are losing patience with the market.