For example, as the price of First Republic Bank dropped 50% within one day, the implied volatility (IV) increased sharply, making it more expensive than usual to buy options (both calls and puts). Additionally, when the underlying stock such as IAT is volatile, the premium for options tends to be spiking, requiring buyers to pay more than during less volatile times. You may get a jackpot sometimes, but rolling hedges through options for a long term can be very costly. It's very important to remember that buying options is similar to buying insurance, as the buyer has a higher probability of losing money. Some investors may argue to hedge IAT though put options. Therefore, I believe the risk and reward is high in the long term. Moreover, IAT provides an annualized yield of 4.2% while TLT offers an annual coupon rate of 2.44%. I chose TLT because its long duration and high convexity make it a more effective hedging instrument (but less effective in a high inflation backdrop), as the bond-stock correlation went back to the negative territory in early March. While some investors, including Bill Ackman, may argue that US regional Banking system is still at risk, I think the portfolio will be less volatile by implementing hedging strategies such as the 20 Plus Year Treasury Bond ETF ( NASDAQ: TLT ). It may take some time for the sector to recover.ĭespite these challenges, I believe that now is a good time to gradually build up regional bank positions through ETFs like IAT to avoid idiosyncratic risks, as the ETF is getting closer to the 2020 pandemic low, which I consider to be a strong resistance level from a technical standpoint. While some regional banks have seen deposit inflows in recent weeks, many investors remain concerned about potential credit risks in the US regional banking system. As a result, the regional banks ETF ( NYSEARCA: IAT ) has tanked 13% in just five days and is approaching a 40% drawdown on a year-to-date basis. This week, the rout in bank stocks deepened, with PacWest ( PACW) and Western Alliance ( WAL ) both sinking almost 50% on Thursday after the sale of First Republic Bank to JPMorgan Chase & Co ( JPM ) last weekend. The recent failures of two large regional banks in mid-March have left investors feeling pessimistic about the near-term outlook for the sector.
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