(Bloomberg) — Hundreds of millions of dollars worth of stock options tied to failed lenders SVB Financial Group and Signature Bank expire Friday, with no certainty if or how they can be exercised.
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Both institutions’ shares have stopped trading after their collapse this week, casting doubt on the ability of in-the-money options holders to exercise those contracts. In other words, traders betting on stock falls — rightfully so, as both lenders’ stocks plummeted before their collapse — could struggle to turn a profit.
According to calculations by Bloomberg, based on the most recent trading session for each stock, there are about 7,660 put options on SVB Financial, valued notionally at $114 million, expiring on Friday, and another 22,347 worth $178 million. dollars on signature. Assuming the banks’ stocks are now worthless, they all represent winning bets.
Options Clearing Corp., which provides derivatives clearing and settlement services, announced Tuesday that its usual process of automatically exercising options on contracts tied to Signature and SVB would not take place. Because when stocks aren’t trading, there’s technically no way to value them and determine which options are in the money.
“A price of the underlying security is displayed, but members should not consider that price as a reliable estimate of the value of the underlying security sufficient to make exercise decisions,” the OCC said in a memo.
All of this means that the first hurdle option holders have to explicitly instruct their brokers if they want to exercise the contracts. Given the valuation issue and the trading halt, it’s unclear how many holders will opt for it — and if so, how easily the transactions will be processed.
“I’ve followed up a lot of questions about these options,” said Alon Rosin, head of institutional equity derivatives at Oppenheimer & Co. “Everybody who’s involved, institutional players, everybody who’s been on these puts long, comes to me with questions came. They were just nervous, ‘What should I do?’”
The fate of most options will depend on where the stocks are priced, he said, but “where it’s tagged and whether they’ll be monetized, no one knows.”
The buyer of a put option has the right, but not the obligation, to sell stock at a specific price. If they exercise their option, the seller of the contract must buy the shares at the agreed price.
Based on the latest option data update, the highest open interest in puts on Signature Bank expiring Friday is at a $50 per share strike price. The traders who sold those contracts — and took a premium upfront — are now obligated to buy the stock at that price — assuming they haven’t hedged their positions — even though the market value may have fallen to zero.
Big brokers like Interactive Brokers, Schwab Corp. and TD Ameritrade Holding Corp. have indicated that they will allow option holders to exercise their contracts, although it remains unclear if and how they will be able to do so.
“We’re likely going to see a lot of confusion,” said Brent Kochuba, founder of options platform SpotGamma. “It’s unlikely to be a smooth process.”
Robinhood is allowing some clients who hold profitable positions in Signature Bank to hold their positions past Friday’s expiration date, the Financial Times reported, citing an email from the firm.
With no apparent solution in sight, disgruntled option holders have taken to Reddit and Twitter to vent their frustration, and some have even set up a website – SBNYputs.com – to air their grievances about their contracts appearing to be broken cannot exercise.
Even if some put holders do manage to exercise their options, no one can say for sure which contracts are in-the-money without an updated value. According to Kochuba, a possible solution to the valuation problem would ultimately be to list the banks’ shares over the counter.
Meanwhile, margin risk adds another complication, according to Steve Sosnick, chief strategist at Interactive Brokers. This is because the amount of collateral a trader is required to deposit in an account is tied to the last closing price of the underlying stock.
That was $106.04 for SVB and $70 for Signature. In other words, even if a trader were to sell a $30 put on SVB, they would still need to have sufficient funds in the account to cover the position as if it were priced at $106.04.
“You could find yourself in a margin deficit as the short position is immediately marked at the last traded price,” Sosnick said. “And that position will remain in place until the Depository Trust Company or Options Clearing Corp. determine the final value. This can take a while.”
–Assisted by Bre Bradham.
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Source : finance.yahoo.com