Signal du Jour - short vol in KRE

Is the risk in regional banks totally justified?

Implied vol is back! Will it stick around? Only the market Gods know, but in the meantime, it’s time to be cautious and, as much as possible, neutralize directional exposure—unless, of course, you can read the market as well as Madam Irma reads fate in her tea leaves.

Jokes aside, with NFP tomorrow and the potential to shake up growth expectations (and reignite inflation fears), there’s no doubt some participants will be feeling a little itchy about specific corners of the market. One sector, in particular, has caught our attention: financials. After spending the early part of the year relatively sheltered from post-election shenanigans and the shifting tech landscape post-Deep Seek, we’re now seeing a resurgence in volatility there.

That’s no longer the case as clouds gather over the U.S. economy, fueled by the contradictory effects of policy (how exactly does inflation from tariffs pair with a rate cut in a potential recession, Sir?). So today, we turn our attention to one of our favorite tickers—KRE, the ETF tracking regional banks.

Let’s dig in.

The context

Back in March 2023, the market woke up to the dangers of rapid rate hikes and the poor risk management of banks that had locked in long-term bonds at laughably low rates (because, remember, rates were never supposed to go above 2% again?). Fast forward to 2025: rates are still high. While the market isn’t immediately worried about them rising further, it is increasingly uneasy about something even more disruptive—President Trump.

During his Tuesday address to the nation, he boldly declared that he’s “only getting started.” The market got the memo. With long-term bonds at 4%, many investors are opting to sit in cash rather than equities.

The SP500 has erased all its post-election gains, Bitcoin is at its lows, and regional banks are under pressure—much more so than the broader financial sector, which, for now, is weathering the storm relatively well. Yet, the stress in February has been real, realized volatility has picked up, and one can legitimately wonder when, if ever, the genie will be put back in its bottle.

Short term realized volatility has definitely picked up over the month of February, yet there is room left before reaching recent stress levels.

While we’re still far from the chaos of the regional bank crisis, KRE is creeping toward the highest volatility levels seen in the past two years. The key difference this time? The entire market is up in the air, with no clear consensus on what comes next. The uncertainty isn’t isolated to financials, and while we expect realized volatility to climb higher (toward 30% compared to the current 24% annualized), we need to be clear: if the broader market sentiment continues to deteriorate, this forecast could go completely out the window.

We still expect realized volatility to expand quite significantly over the next month.

With that in mind, let’s now see how the options market has reacted and identify the best segment of the maturity cycle to structure an optimal trade.