Here’s Why You Should Read Between the Lines of Unusual Options Volume

As the equities market seemingly put the banking sector crisis behind it, the sharp volatility of Deutsche Bank (DB) last Friday reminded investors that we may still be far from a substantive solution. Heading into the weekend, DB stock dropped a little over 3%. In the past five sessions, shares tumbled nearly 5%. And in the trailing month, they’re down almost 24%.

To be fair, the red ink that Deutsche Bank printed hardly compares to some of the negativity associated with troubled U.S. regional banks. Most notably, First Republic Bank (FRC) fell more than 33% in the trailing one-week period. And in the past month, it dropped a catastrophically horrific 89.86%. In terms of lifetime performance, FRC hemorrhaged nearly 55%.

So, Deutsche Bank is no First Republic but that’s little comfort to investors. Fundamentally, that the failure of two major U.S. banks led to troubles for similar competitors is sad but isn’t surprising. What has investors on edge is that domestic fissures appear to have sparked an international crisis.

In a bid to reassure the global markets, German Chancellor Olaf Scholz emphasized in a news conference that “Deutsche Bank has thoroughly modernized and reorganized its business and is a very profitable bank.” To be sure, analysts have pointed out that DB is well positioned from a capital and liquidity standpoint compared to other large banks.

However, DB stock may be a case of “do as I do, not as I say.” According to Barchart.com’s unusual stock options volume indicator, DB’s total volume following the March 24 session reached 213,518 contracts against an open interest reading of 411,955. The delta between the Friday session volume and the one-month average volume came out to 853.04%.

Significantly, call volume hit only 46,826 contracts while put volume stormed to a count of 166,692. Thus, options traders seem to be reading between the lines and retail investors might want to do the same.

Unusual Options Volume Fears the Famous Last Words

Interestingly, Chancellor Scholz, when asked whether Deutsche Bank would become the next Credit Suisse (CS) stated that, “[t]here is no reason to worry.” Those might be the famous last words regarding market stability in the near term.

Indeed, brewing mistrust among Americans toward government entities may be translating overseas. After all, CEO Greg Becker of SVB Financial Group (SIVB) subsidiary Silicon Valley Bank urged venture capitalists to “stay calm” amid concerns about a capital crunch. On a conference call, Becker remarked that the bank had “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble, that would be a challenge.”

Well, it turned out that investors had every reason to fear catastrophe. The next day, Silicon Valley Bank failed. And while a joint statement by the Treasury, Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) stated that the U.S. government will protect depositors of the failed institutions, no such protections would be afforded investors.

Granted, common stock shareholders tend to be last in line for liquidation proceedings – that’s always been the deal. However, in most cases, stakeholders of troubled enterprises have time to decide what they want to do with their securities. With Silicon Valley Bank, the implosion came like a thief in the night.

On March 8, SIVB stock closed the session at $267.83. On March 9, shares plunged to $106.04. The next day, it was all over. If you want to know why investors are so jittery, it’s not just about deposit protection or the lack thereof. Rather, it’s that one’s investment can lose 100% of its market value within three days. Not even cryptocurrencies are that wild in most cases.

Watch What Traders Are Buying

On the other end of the equation, investors should also consider what options traders are buying. For instance, one of the highlights of Friday’s unusual stock options volume screener was Harmony Gold Mining (HMY). Against a total volume read of 3,053 contracts, 96% was earmarked for call options. Also, Wheaton Precious Metals (WPM) reached a total volume of 10,707 contracts. Here, 86% of the metric was earmarked for call options.

Fundamentally, what’s worrisome about rising investor interest in gold or gold-related stocks centers on the “dumb” nature of the asset class. Obviously, gold is a commodity – a very valuable one undoubtedly but still a commodity. Therefore, it hires no workers, generates no earnings and pays no dividends.

If investors who historically shun gold for the aforementioned reasons suddenly find value in the precious metals complex – under a hawkish environment, no less! – then the banking sector may be worse off than the heavyweights are letting on. That’s not to say that investors should approach these events in a conspiratorial framework. However, it might pay to read between the lines.

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