Options in financial ETF becomes a crowd favorite

By Doris Frankel

CHICAGO (Reuters) - Traders flocked on Friday to put options in an exchange-traded fund tracking the performance of the financial sector on renewed fears that credit problems could create further fallout in the battered sector.

The increased number of bearish bets in the Financial Select Sector SPDR fund XLF.A may also be the result of U.S. regulators' crackdown on short selling, affecting the shares of 19 major financial firms.

Roughly one million options traded in the XLF, with puts outnumbering calls by a factor of 1.71, topping its normal level of 840,000 lots, according to Trade Alert.

The XLF, which holds the financial-related components from the Standard & Poor's index, was the option crowd's top favorite, data from option analytics firm Trade Alert showed.

"The put trading we are seeing in the XLF is protection against a further sell-off in the financial sector, as well as a slight increase in speculative trading on continued weakness in the overall market," said Al Greenberg, head options trader at broker-dealer BNY ConvergEX Group.

Fundamentally, concerns about the impact of the housing slump on the economy and the health of U.S. banks are still hanging over the sector.

"People are worried about credit quality and the potential for additional failures in the banks," said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.

SHORT RULE WILD CARD  Continued...