Put activity lights up in KBW regional banking ETF

CHICAGO, July 18 (Reuters) - Option trading on Friday in an exchange-traded fund tracking the performance of regional banking stocks suggested more pain for the battered sector in the next few months as fears about the credit crises continues.

"It would appear that the regional banks are not out of the woods," said Interactive Brokers Group equity options analyst Rebecca Engmann Darst, referring to the put activity in the KBW regional banking ETF.

"For many it is a question not simply of write-downs but of viability," she added.

In all, about 187,000 puts and 7,702 calls changed hands in the SPIDER KBW Regional Banking ETF KRE.A, 50 times the normal volume according to option analytics firm Trade Alert.

The ETF, a fund which is an equal-dollar weighted index consisting of 50 different banking names, rose 37 cents, or 1.31 percent, to $28.70.

Despite the share gains, at least one investor seemed to be placing a bearish bet the fund would suffer significant losses by this September.

Late on Friday, it appears a trader bought 80,000 September $22.50 KRE puts at 90 cents a contract and sold 40,000 September $25 puts at $1.80, Darst said.

The trade had all the earmarks of a two-by-one put spread because the strategist was buying twice as many of the lower put strikes and selling the higher strike.

One way to protect an existing stock position or to bet on stock weakness is to buy a put option, which gives the investor the right to sell the stock at a given price and time. A call conveys the right to buy the stock.

The spread was traded on the Philadelphia Stock Exchange, said options strategist Frederic Ruffy at Web information site WhatsTrading.com, citing Trade Alert data.

The strategist who got into the trade would see significant profits if the ETF makes another move lower and falls back below $25 a share by September options expiration, Ruffy said.

It looked like the trader was doubling up on downside protection and funding this through the sale of the higher strike put.

"In other words, if the trader believes the fund will go down, it would go down significantly," Darst added. (Reporting by Doris Frankel; Editing by Andre Grenon)