L Brands Option Trading Extremely Bearish Following Victoria's Secret Buyout Reports

L Brands Inc LB shares are up 34.7% in the past three months on reports the company is approaching a deal to sell its Victoria’s Secret brand to Sycamore Partners. While the market seems to see the deal as a positive for L Brands, large options traders aren’t quite as optimistic.

The Trades

On Monday, Benzinga Pro subscribers received seven option alerts related to unusually large trades of L Brands options. Here are the four biggest:

• At 9:40 a.m., a trader bought 2,057 L Brands call options with a $25 strike price expiring on Feb. 21 near the ask price at 45 cents. The trade represented $92,565 bullish bet.
• At 11:41 a.m., a trader bought 1,542 L Brands put options with a $22.50 strike price expiring on Feb. 21 near the ask price at 45 cents. The trade represented $69,390 bearish bet.
• Less than a minute later, a trader bought 1,729 L Brands put options with a $22.50 strike price expiring on Feb. 21 near the ask price at 50 cents. The trade represented an $86,450 bearish bet.
• At 12:44 p.m., a trader bought 500 L Brands put options with a $30 strike price expiring in January 2021 near the ask price at $8.206. The trade represented a $410,300 bearish bet.

Of the seven total large L Brands option trades on Monday morning, just one was for a calls purchased near the ask, a trade typically seen as bullish. The remaining six trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small sizes of the largest L Brands trades by institutional standards, they are unlikely to have represented institutional hedging.

See Also: L Brands Closer To Victoria's Secret Sale, CNBC Says; Link Calls Brand 'Mismanaged'

Not A Done Deal?

The large option trades in L Brands come after CNBC reported Sycamore Partners and L Brands could reach a deal on a Victoria’s Secret buyout as soon as next week.

L Brands CEO Les Wexner has been under pressure to make an aggressive move due to poor performance of the Victoria’s Secret brand under his watch. Wexner is also reportedly in talks to step down from his position due to in part to ties to Jeffrey Epstein.

CNBC did not report potential terms of the deal, and its source said negotiations are still ongoing, meaning the deal could still fall through. L Brands has reportedly been pursuing a spin-off of Victoria’s Secret since at least November.

The spin-off rumors have gotten L Brands stock back on track for now, but the stock remains down 74.2% overall in the past five years in a difficult retail environment. Monday’s put buyers may believe shareholders won’t be pleased with the price L Brands will ultimately fetch for Victoria’s Secret, or they may simply be betting negotiations fall through all together.

Bullish StockTwits message sentiment related to L Brands jumped from just 44.8% on Friday to 62.9% Monday following the report. It remains well below its 2020 high of 86.9% bullish back on Jan. 18.

Benzinga’s Take

Most of Monday’s option trading activity took place in near-dated contracts expiring within the next two weeks, suggesting traders are expecting some kind of buyout news soon. However, the largest trade of the morning was much more long-dated and has a break-even price at or below $21.80, suggesting at least 8.7% downside for L Brands over the next 11 months.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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