Morgan Stanley Option Traders Bet Millions On 25% Long-Term Downside

Shares of Morgan Stanley MS traded higher Tuesday as the S&P 500 closes out its best quarter since 1998 despite rising concerns over a second wave of COVID-19 infections.

Bank stocks have an uphill battle in 2020 to generate profits after the Federal Reserve cut interest rates essentially to zero in March to help support the economy. At least one large option trader on Tuesday was betting that the next 1.5 years won’t be as kind to Morgan Stanley as the last three months have been.

The Morgan Stanley Trades

On Tuesday, Benzinga Pro subscribers received four option alerts related to unusually large Morgan Stanley option trades:

• At 10:16 a.m. ET, a trader sold 500 Morgan Stanley call options with a $50 strike price expiring on July 17. The contracts were sold at the bid price of 95 cents and represented a $47,500 bearish bet.
• At 11:05 a.m. ET, a trader bought 1500 Morgan Stanley put options with a $45 strike price expiring in January 2021. The contracts were purchased at the ask price of $5.10 and represented a $765,000 bearish bet.
• At 11:11 a.m. ET, a trader bought 1,700 Morgan Stanley put options with a $43 strike price expiring in January 2022. The contracts were purchased at the ask price at $7.321 and represented a $1.24 million bearish bet.
• At 11:14 a.m. ET, a trader bought another 1,700 of the same Morgan Stanley put options with a $43 strike price expiring in January 2022. The contracts were purchased at the ask price at $7.321 and represented a $1.24 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 relatively large size of the largest Morgan Stanley option trades, there’s certainly a possibility they could be a hedge on a large position in Morgan Stanley stock.

Are Bank Stocks Going Bust?

There was no specific major news out on Morgan Stanley on Tuesday, but the company was among the big banks that said Monday it performed well enough on the latest Federal Reserve stress test to maintain its current 2.9% dividend. The firm said it has been accruing capital ever since it suspended its buyback program back in March.

Bank stocks got some good news last week after the FDIC said it plans to ease the Volcker Rule, which restricts banks from making large venture capital investments. The change will reportedly free up billions of dollars in bank capital.

On June 24, D.A. Davidson upgraded Morgan Stanley to Buy and set a $58 price target for the stock. Analyst David Konrad said the bank is well-positioned to outperform its big bank peers thanks to rising financial markets, elevated retail trading activity and relatively low credit losses.

Despite the optimism on Wall Street, at least one large option trader on Tuesday doesn’t seem to be buying the bullish outlook for Morgan Stanley.

Benzinga’s Take

U.S. banks navigated zero interest rates for years during the financial crisis recovery, and they are much more efficient today than a decade ago. However, the COVID-19 outbreak is creating unprecedented economic uncertainty, and Dr. Anthony Fauci said the U.S. could face 100,000 new coronavirus cases per day if the U.S. continues on its current trend.

Hopefully, the January 2022 expiration date of the puts purchased on Tuesday isn’t an indication of how long the buyer believed the COVID-19 fallout will last. The puts have a break-even price of $35.68, suggesting at least 25.1% downside for Morgan Stanley over the next year and a half.

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

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