(Bloomberg) — Stock options worth hundreds of millions of dollars belonging to failed lenders SVB Financial Group and Signature Bank are set to expire Friday, leaving it uncertain whether they can be redeemed.
Read the most from Bloomberg
Shares of both institutions are no longer trading after their collapses this week, casting doubt on the ability of in-the-money option holders to exercise those contracts. In other words, traders who bet on a decline in the stock — correctly so, since both lenders’ shares declined prior to their collapse — may struggle to collect profits.
There are approximately 7,660 put options on SVB Financial worth $114 million and another 22,347 on Signature worth $178 million, according to Bloomberg’s count based on the last trading session for each stock. Assuming that the banks’ shares are now worthless, they all represent winning bets.
Options Clearing Corp., which provides clearing and settlement services for derivatives, announced on Tuesday that its usual process of signing and automatically exercising contracts involving SVBs will no longer take place. This is because when the shares are not trading, there is technically no way to value them and determine which options are in-the-money.
“An underlying security price will be shown, but members should not view this price as a reliable estimate of the underlying security price sufficient to determine exercise decisions,” the OCC said in a memo.
This means, as a first hurdle, option holders must specifically instruct their brokers if they wish to exercise the contracts. Given valuation issues and the trading halt, it is unclear how many holders will choose to do so – and if they do, how easily the transaction can settle.
“I see a lot of questions about these options,” said Alon Rosin, head of institutional equity derivatives at Oppenheimer & Company. “Everyone who is involved in this, the institutional players, everyone who has been in these puts for a long time, is coming to me with questions. They were in a panic, ‘What do I do?'”
The fate of most options will be tied to where the shares are priced, he said, but “where it’s marked and whether they’ll be monetized, nobody knows.”
The buyer of a put option has the right, but not the obligation, to sell the stock at a specified price. If they exercise their option, the seller of the contract must buy the shares at the agreed upon price.
Signature Bank’s Puts have the highest open interest on Friday at a strike price of $50 per share, based on the latest options data update. So the traders who sold those contracts — and collected a premium upfront — are now obligated to buy the stock at that price — assuming they haven’t hedged their positions — even if the market price has dropped to zero. .
Major brokers such as Interactive Brokers, Schwab Corp and TD Ameritrade Holding Corp have indicated they will let option holders exercise their contracts, although it is unclear if and how they will be able to do so.
“We are likely to see a lot more confusion,” said Brent Kochuba, founder of options platform Spotgamma. “It is not likely to be a smooth process.”
The Financial Times, citing an email from the firm, reported that Robinhood is allowing some customers on Signature Bank to hold their positions beyond Friday’s expiry date.
With no clear solution in sight, angry option holders have taken to Reddit and Twitter to vent their frustration, with some even setting up a website – SBNYputs.com – to express their grievances. unable to properly exercise their contracts.
Even if some put holders manage to exercise their options, without updated prices no one can say with certainty which contracts are in-the-money. According to Kochuba, a possible solution to the valuation issue would be to eventually list the banks’ shares on the over-the-counter market.
Meanwhile, margin risk is adding another complication, according to Steve Sosnik, chief strategist at Interactive Brokers. This is because the amount of collateral a trader is required to deposit into the account is tied to the last closing price of the underlying stock.
For SVB it was $106.04, and for Signature it was $70. In other words, even if a trader sold 30 puts on SVB, they would still need to have enough money in the account to cover the position as if it were worth 106.04.
“You may find yourself at a margin loss because short positions are immediately marked down to the last traded price,” Sosnik said. “And this position will remain in place until the Depository Trust Company or the Options Clearing Corp. determine the final price. This may take some time.”
With the assistance of Bre Bradham.
Read the most from Bloomberg Businessweek
©2023 Bloomberg L.P.