The current banking crisis continues to unfold as Toronto Dominion Bank faces a large short position and US regional banks like First Republic struggle with falling deposits. Amidst this uncertainty, bearish options traders are ramping up bets on further declines in the beaten-down shares of First Republic Bank, while technical analysis by Vishal Toora also signals potential downside. However, strategists warn that traders could run into trouble cashing in their wagers if the bank goes into receivership.
First Republic’s shares fell as much as 42% to a record low of $3.00 on Friday after CNBC reported the troubled bank was most likely headed to receivership. Options volume soared to 872,000 contracts by 3:30 p.m. (1930 GMT), with puts – used to bet on price declines – outnumbering calls on Friday by a ratio of more than 2.1 to 1.
Technical analyst Vishal Toora also foresees further declines for First Republic Bank, with key support levels broken and strong selling pressure in play. Toora notes that the stock has broken below the lower Bollinger Band, which typically indicates an oversold condition, making it more susceptible to a possible bounce. However, with a downtrend still in place and no clear signs of a reversal, Toora advises traders to exercise caution.
As of Friday, with First Republic Bank shares at $3.67, around 785,000 put options on the bank’s stock were “in-the-money,” meaning that they stood to make a profit, following a 97% collapse in the bank’s share price since March 7.
However, strategists caution that the stock could be halted if the bank goes into receivership, posing a problem for put options holders not unlike one encountered by bearish investors in Silicon Valley Bank, which collapsed last month.
Profitable put options are typically automatically exercised by selling underlying shares – either already owned by the investors or newly purchased – at a profit. But brokers might restrict share sales when a stock is halted, keeping investors from reaping gains.
Some traders found this out the hard way when they ran into trouble cashing in bearish options bets on failed lenders SVB Financial Group and Signature Bank. The banks’ failure led to some traders initially being unable to cash in winning put options till brokerages made an exception to rules on banning short sales.
The U.S. Federal Deposit Insurance Corporation (FDIC) is preparing to place First Republic under receivership imminently, a person familiar with the matter said on Friday. The U.S. banking regulator has decided that the troubled regional lender’s position has deteriorated and there is no more time to pursue a rescue through the private sector, the source said, requesting anonymity because the matter is confidential.
Stay tuned for further updates on the unfolding banking crisis and how it may impact the equity markets, as well as the broader implications for technical analysis and options trading in volatile market conditions.