(Bloomberg) -- The trading resumption of two insolvent US banks may be a footnote in the larger drama they visited on the financial industry this month. For options traders who placed well-timed bets against the companies before their demise, it could be the break they’ve been waiting for.
Owners of thousands of bearish contracts in Signature Bank and SVB Financial Group likely got a chance to collect on wagers that while profitable on paper, had been impossible to cash in, after the underlying stocks ceased changing hands two weeks go. The fate of the options had been a securities-industry sideshow without an obvious conclusion before OTC Markets Group, an off-exchange platform, let the stocks find a price Tuesday.
“Now we can put a market price on the shares rather than guessing,” said Steve Sosnick, chief strategist at Interactive Brokers. “It also means that positions can be closed out, for better or worse.”
Earlier: Thousands of Options on Failed Banks in Limbo as Expiration Hits
There were about 7,660 put options on SVB Financial worth a notional $114 million due to expire March 17 and another 22,347 worth $178 million on Signature, according to Bloomberg calculations based on the last trading session for each stock. Investors who told their brokers to keep the positions open, and paid margin tied to the bet, may now have the opportunity to cash in.
While the collateral owed — an amount tied to the value of the last closing price of the underlying stocks, $106.04 for SVB and $70 for Signature — was likely not insignificant, the potential payout on bearish bets was huge. Based on options data in the week of March 13, the highest open interest in puts on Signature Bank due March 17 was at a strike price of $50 per share. The shares opened under $1 Tuesday.
“Today it’s essentially perfectly in the money,” Sosnick said.
SVB traded for $267.83 the day before it was halted on March 8. It closed around 40 cents in OTC trading Tuesday.
The buyer of a put option has the right, but not the obligation, to sell shares at a specified price. If they exercise their option, the seller of the contract must buy the shares at the agreed-upon price.
Normally, options automatically execute at expiration when the underlying shares trade on listed exchanges. Since the SVB and Signature shares have moved to OTC, the derivative holders must initiate the execution.
“OCC doesn’t typically do auto-ex on stocks that aren’t exchange traded,” Sosnick said. “Unless something dramatic happens, it means that all call holders will want to lapse them, but all put holders will need to notify their brokers of their intent to exercise.”
Because the Options Clearing Corp. announced at the time that its usual process of automatically exercising options wouldn’t happen for those contracts, owners had to get in touch with their prime brokers to inform them they wanted to manually exercise them — and coordinate whatever collateral was needed to hold the position through its expiry.
“If the person didn’t call, they got screwed because it wasn’t automatically exercised,” said Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives. “At the end of the day, that was a serious issue because not everybody had the money to put up that collateral needed to hold the short stock position — they could have been long a lot of puts and might not have had margin required to hold it up until it traded today.”
--With assistance from Lu Wang.
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