Option Traders Making Massive Bearish Bets On Bank Stocks

Big bank shares traded lower once again on Thursday as the combination of a potential U.S. recession and potentially more Federal Reserve interest rate cuts weighed on financial stocks.

On Thursday, a flurry of large bank option trades were mostly bearish in nature, suggesting investors don’t see the dips in Bank of America Corp BAC, JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC and Citigroup Inc C as buying opportunities.

The Trades

On Thursday, Benzinga Pro subscribers received dozens of option alerts related to unusually large trades of big bank options. Here are a handful of the biggest:

At 10:07 a.m., a trader bought 10,000 Citigroup put options with a $75 strike price expiring on Sept. 18 at the ask price of $33. The trade represented a $33 million bearish bet.
At 10:08 a.m., a trader bought 10,000 Wells Fargo put options with a $50 strike price expiring on June 19 at the ask price of $23. The trade represented a $23 million bearish bet.
At 10:24 a.m., a trader bought 1,333 Bank of America put options with a $20 strike price expiring on June 19 near the ask price at $3.05. The trade represented a bearish bet worth $406,565.
At 10:43 a.m., a trader sold 3,000 JPMorgan call options with a $105 strike price expiring on June 19 at the bid price of $5.05. The trade represented a $1.51 million bearish bet.

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 massive sizes of the largest bank trades and the fact there were so many large trades, it’s extremely likely that at least some of the trades were institutions hedging against large bank stock positions.

Trouble Ahead For Banks

Bank stocks have gotten hit especially hard during the coronavirus sell-off because they face two major risks to their profitability. An economic downturn means less lending in their commercial banking businesses. At the same time, falling interest rates compress the bank’s net interest margins, the difference between the interest the banks pay on deposits and the rates they charge on loans.

Despite the doom and gloom in the market, BofA Securities analyst Erica Najarian said Wednesday a short-term U.S. recession followed by a recovery would be much better in the long-term for U.S. banks than another prolonged period of a near-flat yield curve.

“We actually believe a recession-and-recovery is a better outcome than prolonged yield curve pain, especially in a scenario of negative rates. If we are correct and banks prove their balance sheet resilience in a downturn, and retain dividends, we could see the stocks re-rate to higher premiums on TBV, similar to the 2002 recovery,” Najarian said.

Here’s a breakdown of the percentage of StockTwits messages mentioning each of the four big bank stocks that were bullish in nature on Thursday:

Bank of America: 61.1% bullish.
Citigroup: 35.7% bullish.
JPMorgan: 49.4% bullish.
Wells Fargo: 50% bullish.

How To Read And Trade An Options Alert

Benzinga’s Take

Banks have much healthier balance sheets today than they did in 2008, so the coronavirus sell-off could be an excellent long-term buying opportunity. However, timing the bottom in a volatile market can be extremely difficult, so any buyer should consider taking their position in increments as the market drops.

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

Photo credit: Mike Mozart, Flickr

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