Financial worries spark bearish option trades in ETFs

By Doris Frankel

CHICAGO, April 22 (Reuters) - Many options traders on Wednesday appeared to be taking a protective stance and employed bearish strategies in several exchange-traded funds on concerns the stock market's recent gains are overdone.

The bearish activity comes on a day of choppy trade in the stock market. The Dow Jones industrial average .DJI and the Standard & Poor's 500 index .SPX finished the session lower after disappointing results at Morgan Stanley reignited worries about the banking sector.

The market has been sensitive to the outlook for banks before the release of the federal government's "stress test," expected as early as Friday.

Option trading was heavy in the Direxion 3X Financial Bear Fund (FAZ.P), or FAZ, a leveraged exchange-traded fund designed to move inversely to the financial sector. Its shares hit a low of $8.58, but bounced back as financials lagged late in the session. It closed at $9.90, up 7.73 percent.

The ETF's option volume rose to double the normal levels, with 92,000 calls and 17,000 puts traded, according to option analytics firm Trade Alert.

"Some investors bought May calls at the $9, $10, $11, $12.50, $14, and $15 strikes -- betting that financials might falter and FAZ will move higher," said Frederic Ruffy, options strategist at Web information site WhatsTrading.com.

When bank stocks and other financials fall, the ETF will move higher.

"It is designed to move three times as fast as the Russell 1000 financial services index, so the fund is extremely volatile," Ruffy said.