Bank earnings put financials options pricing anomaly in focus

Large U.S. banks are due to open earnings season next week, and CNBC Options Action said financial stocks have shown improving relative momentum against the broader market for four weeks. The commentary also pointed to unusually low implied correlation, a pricing condition that can make options on sector baskets cheaper relative to options on individual stocks.

The setup arrives as investors reassess leadership in U.S. equities. According to CNBC Options Action, information technology, long the dominant sector in the market, stopped improving on a relative basis four weeks ago and has weakened over the past three weeks.

Relative strength signals measure whether one group is outperforming or underperforming another over time. They can fail, and they do not establish the direction of a sector on their own. In the CNBC analysis, the change in financials’ relative position is being watched alongside potential catalysts from bank earnings, including credit trends, capital markets revenue and net interest dynamics.

Valuation and earnings backdrop

CNBC Options Action said the Financial Select Sector Index trades at about 15.5 times forward earnings. That valuation is roughly 1.25 multiple points below where the group traded in 2024, according to the commentary.

The same analysis said financial companies in the index have tripled adjusted earnings per share over the past decade. The commentary argued that earnings estimates could rise after results if credit conditions, capital markets activity and net interest trends improve, while presenting that outcome as a possibility rather than a confirmed development.

The comparison with technology was central to the CNBC framing. The commentary described the artificial-intelligence trade as more dependent on individual company selection, with hardware names recently faring better than software and services. Financials, by contrast, were described as more directly tied to nominal economic growth, since lenders and capital markets firms often benefit when borrowing, trading, underwriting and asset values are supported by economic activity.

How the options anomaly works

CNBC Options Action highlighted implied correlation as the actionable feature of the market. Implied volatility reflects the option market’s estimate of future price movement embedded in premiums. Implied correlation compares the price of options on a basket, such as an index or sector ETF, with the price of options on the stocks inside that basket.

When implied correlation is high, options on the basket are expensive relative to options on the underlying companies. When it is low, basket options are cheaper relative to single-stock contracts. CNBC said implied correlation is historically low, which in its analysis means options on broad indices and sector products are more favorably priced than options on individual shares.

The example used by CNBC was the Financial Select Sector SPDR Fund, known by its ticker XLF. With the ETF trading around $55.50, the commentary said August $56 call options were available for about $1, or less than 2% of the ETF price, covering roughly six weeks that include a key stretch of earnings season.

A call option gives the buyer the right, without an obligation, to buy the underlying asset at a specified strike price before expiration. For the cited XLF August $56 call, CNBC listed a maximum loss of $100 per contract, reflecting the premium paid, and described the potential gain as unlimited in the trade table. Those figures were presented as part of CNBC’s options example, not as a recommendation or assurance of outcome.

This story draws on original reporting from CNBC.