Trading in options on bank stocks has dwindled in recent months, a sign that some traders believe the sector may be due for a slowdown.
Speculators who trade on the Chicago options exchange are less willing than they were a few months ago to bet on a continuation of the recent rally for shares of NationsBank Corp., BankAmerica Corp., and Citicorp, according to the Investment Research Institute, Cincinnati.
"The lack of heavy speculation suggests that the general sentiment is that stocks have gone too far too fast," said Robert Rack, research manager at the institute. "There are low expectations because there is a general feeling that they (the bank stocks) may be overdone."
Reading the future stock price movements from trading activity can be tricky. Indeed, Mr. Rack says he believes the speculators may be wrong and that bank stocks could rise still higher.
Investors buy call options when they think shares will go up, and put options when they think the shares are likely to fall. But put-options volume can be a bullish sign as well-as apparently was the case with the banking-stock options late last year-because market makers use put options to hedge their own risks when the call options are active.
In any event, many investors study option-trading trends to gauge market sentiment and merger speculation.
"An increase in the trading of a stock's options over the normal daily volume is often a precursor of movement by the stock itself," said Lawrence McMillan, president of McMillan Analysis Corp., Morristown, N.J. "This is especially true in advance of news items, such as earnings reports or takeovers."
Call options on Fleet Financial, for example, were trading at three times the average daily volume a few weeks ago, when merger rumors were swirling around the company. Although Fleet officials denied the rumors, options have continued to run at double their average daily volume since then.
Dwindling options activity in the broader bank market suggests that bank investors aren't as euphoric as one would expect them to be, given the meteoric rise of many of their stocks in the last year, Mr. Rack said. The lack of interest in such widely traded banks as BankAmerica, Citicorp, and NationsBank is especially unusual, he added.
"Speculators usually flock to a sector in such a strong upward trend," he added. "A lot of the option players tend to be trend followers."
The institute reported that "the options crowd has turned pessimistic" on shares of NationsBank since its stock split.
And although Mr. Rack expects Citicorp shares to "take out old highs" in the near term, the institute noted a lull in Citicorp option activity for most of February.
Though some observers noted that trading volume often declines from a December peak in the first few months of the year, Mr. Rack said such a decline in the financial sector could signal negative sentiment.
Indeed, the stocks of money-center banks began to back off from their highs earlier this week. As the American Banker index of 225 bank stocks fell in trading Tuesday, shares of BankAmerica Corp. lost $3.37, while NationsBank lost $1.25 and Citicorp lost $1.75.
In trading Wednesday, BankAmerica lost 87.5 cents to $118.50, NationsBank slipped $1 to $62.75, and Citicorp fell $2.125 to $122.50.