At one point in Thursday trading, First Republic Bank (FRC) stock was over $35, 73% higher than its low for the day. The catalyst for the jump: News that 11 big banks, including JPMorgan & Chase (JPM), would inject $30 billion of uninsured deposits into the regional bank, sending a message to investors that its finances were in order.
Early afternoon in Friday trading, the FRC lovefest has died. Its shares are down 26% and likely to fall further as buyers head out for St. Paddy’s Day celebrations.
As a result of the $30 billion injection, the S&P Regional Banking ETF SPDR (KRE) experienced unusual options activity on Thursday. I counted at least 32 options with Vol/OI ratios of 1.25 or greater on the day.
If you want to lay down a bet on the beleaguered industry, here are three KRE options that look interesting.
Here’s a Short Duration Possible Bet
I consider short duration to mean options with DTEs (days to expiration) of 30 days or less. So, excluding those under seven days, 15 options (pardon the pun) were available with nine puts and six calls.
Of the nine calls, the March 24 $46 is the most appealing for two reasons.
First, its strike price is tied for the lowest with the March 31 $46 call. The March 24 call has an ask price of $2.20, while the ask for the call that expires a week later is $2.99. So, assuming you chose to exercise your call, you’d pay $48.20 for the former, compared to $48.90 for the latter, which has an extra week to expiry.
Secondly, the delta for the March 24 call was 0.53894 compared to 0.54121 for March 31. So, to double the value of your call, the former would need to appreciate by $4.08 compared to $5.52 for the latter.
Of course, this is all an exercise in theory. As I write this, the March 24 ask price is $1.07 on low volume, while March 31 also has low volume with a $1.53 ask. So, the March 24 ask is off 51.4% from yesterday, while KRE is down nearly 6% on the day.
However, if you believe KRE will be higher than $47.07 in a year, you’re better off buying the ETF with a limit order.
This One’s More Middle of the Road
I consider mid-duration options with DTEs of 30 to 180 days. On Thursday, four options were available, with three puts and one call. I’m going to focus on the puts for this one.
Starting with the most extended duration of 92 days, the June 16 $42 bid price was $2.54. So, if you sold one of these contracts, you would have secured $254 in income and a net price of $39.46 if forced to buy the stock. Over the past five years, KRE has rarely traded below $40, so it would be a good entry point.
Next up is the May 19 $46 put. It had a bid price of $3.65, so it’s a yield of 7.9%, 190 basis points higher than the June put from above, but the net price paid would be $42.35, below where it’s currently trading, but $2.89 higher than the June 16 put.
Let’s consider the third put option before deciding what course of action makes sense.
The final put option is the April 6 $37 put. Not surprisingly, it had the highest volume (5,152) of the three on Thursday and a Vol/OI of 3.28. With 36 days to expiry, its bid was just $0.49, or a yield of just 1.3%. That makes sense given your net price should it be put to you (unlikely) $36.51, the lowest price of the three put options.
Bottom Line: If you want to buy KRE for the long haul, I’d go with the 92-day put. You’ve got a good shot of buying it under $40 while generating a 6% yield over three months if it doesn’t fall below $42.
Going Long Has Its Advantages
I consider long-duration ETFs to be anything expiring 181 days or longer. So there are two puts and two calls.
The two calls, conveniently enough, are both Jan. 19/2024 contracts, with strike prices of $52 and $57. The former had a $4.15 bid, while the latter was $1.76. I can see why the $52 strike had a Vol/OI of 106.06. The yield is 8.0% over a little less than a year (309 days), almost 500 basis points higher than the $57 strike.
Of course, if you think it will be above $52 in a year, buying the stock at current prices makes sense, regardless of the $415 in premium income.
The June 16 $42 put is the most appealing of all the options mentioned. As I write this, it’s got a $3.75 bid price for a net price of $38.25, $1.21 cheaper than yesterday.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.