Large Option Trader Makes Bearish Long-Term Bets Against PG&E

PG&E Corporation PCG shares are down 43.2% in the past month after a bankruptcy judge ruled in August that a jury should decide whether or not the California utility will be responsible for damages related to the 2017 Tubbs wildfire in California.

On Tuesday, at least one large option trader made several large bets that PG&E’s 2019 story will not have a happy ending.

The Trades

On Tuesday, Benzinga Pro subscribers received 22 option alerts related to unusually large PG&E trades.

• At 10:34 a.m., a trader sold 2,600 PG&E call options with a $13 strike price expiring on Dec. 20 at the bid price at $1.781. The trade represented an $463,060 bearish bet.
• At 10:49 a.m., a trader bought 2,500 PG&E put options with a $8 strike price expiring on Dec. 20 at the ask price of $1.551. The trade represented a $387,750 bearish bet.
• At 10:57 a.m., likely the same trader bought another 4,600 of the same PG&E Dec. 20 $8 put options at the ask price of $1.551. The order was broken up into two trades that were executed almost instantaneously and represents a $713,460 bearish bet.

All together, the four large PG&E options trades represented a total bearish bet of more than $1.5 million.

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 at least two of the trades were relatively large, broken up into two orders and executed within a second or two of each other, at least some of Tuesday’s trading activity could possibly be hedging of bullish institutional stock positions.

Will Shareholders Get Wiped Out?

On Aug. 19, PG&E shares tanked after a judge ruled that a jury should determine whether or not PG&E is on the hook for up to $18 billion in additional wildfire damages. Later that week, U.S. Bankruptcy Judge Dennis Montali lifted a freeze on liability lawsuits tied to the 2017 Tubbs fire, a move which can open the door for further claims against PG&E.

The Tubbs fire killed 22 people and destroyed 5,600 structures, and the market had not anticipated the judge lifting the freeze. Just prior to PG&E’s bankruptcy filing earlier this year, the state of California ruled that PG&E equipment was not the cause of the Tubbs fire, with investigators concluding it was sparked by a private electrical system.

Benzinga’s Take

The bearish trading activity could easily be a hedge given the risk that PG&E shareholders get completely or nearly wiped out during the company’s bankruptcy proceedings and subsequent restructuring. Given the uncertainty surrounding the PG&E proceedings, options provide a relatively cheap way to hedge either bullish or bearish stock bets.

Traders should keep an eye out for PG&E’s formal bankruptcy plan, which is expected to be filed by Sept. 9.

Related Links:

PG&E Shares Tank After New Bankruptcy Rulings

How To Read And Trade An Options Alert

A PG&E yard in San Francisco. Photo by Peter Merholz via Wikimedia.