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Morning Update

On Friday US stock indices rallied to close at the top of their weekly range. We saw lots of call buying, particularly in the financial sector, as traders bet on banks to lead the market higher due to supportive measures from the ECB and possibly the Fed.

10,000 BAC Oct. 9 Call traded on the offer at $0.31. This suggests a trader was buying October calls, anticipating that BAC would be above 9.31 at October expiration. Bank of America has recently formed a double bottom formation at 7.00 and moved sharply upward on heavy volume last week through resistance at 8.30.

30,000 EWJ Jan. 10 calls traded on the offer at $0.09. EWJ is the iShares MSCI Japan Index Fund, and this options trade suggests that the trader is bullish on Japanese equities. The breakeven price of this trade is 10.09, which is just below EWJ’s year-to-date high of 10.20.

80,000 XLF Oct. 16 calls traded on the offer at $0.20. The XLF is the SPDR Financial Select Sector ETF, which rallied hard last week. XLF’s 2012 high is 16.00, which the ETF looks poised to test sooner rather than later. This option trade suggests the trade expects the ETF to run through 16 and on up through October expiration. Should the ETF break through resistance at 16.00, 17.20 is the next resistance level.

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