An astute institutional investor made a very unusual put option trade in Signature Bank (SBNY) stock. This is based on Barchart's Unusual Stock Option Activity Report on March 8.Â
The trade indicates that the investor is very positive the stock will not fall dramatically in the next month and a half. This is despite fears that the Fed may raise interest rates higher than expected.
In short, the investor generated a 3.0% yield by shorting a near-term, deep out-of-the-money put option. This is a favorite type of option trade for institutional investors. That works to an annualized return of 24%, as will be seen below. Here is how they performed this lucrative trade.
Signature Bank Stock is Cheap
As of right now, SBNY stock trades for $104.88 per share. The bank has a $6.54 billion market cap but is valued at just 7.1x average analyst earnings for 2023, according to Seeking Alpha.
The stock has been rocked by news from Bloomberg today that non-corporate clients of the cryptocurrency exchange Kraken will not be able to make dollar deposits or withdrawals using Signature Bank. This is a direct result of the bank's own decision to set a limit at Binance on transactions that were not $100K or higher. In other words, it is pulling away from crypto transactions from retail customers.
This clearly de-risks the bank, but some investors, or perhaps crypto traders may not have liked that decision.
As a result, its put and call option premiums have risen. Here is what one trader did today to take advantage of this.
The Unusual Short Put Trade Today
The Barchart Unusual Stock Options Activity Report today shows that one trader shorted 5,000 or more put options at an $80 strike price for expiration on April 21. The price received for this short put trade was $2.43 per put option.
This means that the investor had to secure $8,000 in cash and/or margin with the brokerage account per put. But the account immediately received $243, which works out to a 3.0% yield.Â
The key here is that the strike price is very far away from the spot price, since $80 is $24.88 below $104.88. That means that SBNY has to fall over 23.7% before the investor would even be required to purchase the SBNY stock shares at $80.00. And even if that happens, the investor's breakeven point is $77.57 (i.e., $80-$2.43 premium received), or 26% below today's price.
In other words, the likelihood of a loss here, which would only be an unrealized loss, is very low. Moreover, if this trade could be repeated 8 times over a year (i.e., 365/44 days = 8x rounded), the annualized return is 24%.
This shows that the investor, who had to put up $40 million in cash or margin (i.e., $5,000 x $80 x 100), immediately received $1.215 million. Given that only an institutional investor could afford this, the trade is in rarified air. They will likely trade out of the position as the price falls and the profit climbs.
Nevertheless, the good news is retail investors can consider copying this trade. Just keep in mind that there are risks with this trade, including the possibility of a huge loss if the stock falls well below $80 by or before April 21.
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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
