Bets Against Signature Bank Stock Paid Off—on Paper, at Least
Summary
Some put options holders say their brokers have made it difficult to exercise their options
For options traders, betting that shares of Signature Bank and SVB Financial Group would plummet was the easy part. Trying to cash out has been harder—and, for many, unexpectedly costly.
The banks failed two weeks ago and were taken over by regulators, which essentially wiped out the value of their shares. That is an outcome that should be good news for investors owning puts, options that confer the right to sell shares at a stated price by a certain date.
So far, some of these options holders have been stuck in a sort of securities industry limbo. Shares of both Signature and SVB, the parent of Silicon Valley Bank, have been halted since their failure. Signature Bank and SVB—which has filed for bankruptcy—stand to start trading in the over-the-counter market Tuesday, potentially allowing traders to exit positions after more than a week of uncertainty.
Some traders say their brokers have made it hard to exercise the options. Others say they are stuck posting thousands of dollars in collateral with their brokers just to keep open the possibility that they will be able to close out the trades.
“None of us anticipated this type of friction and uncertainty," said Daniel Mandia, a 41-year-old contractor who bought put options tied to Signature Bank and has been vocal on Twitter about the difficulties in cashing out.
Signature Bank and Silicon Valley Bank’s abrupt failures are some of the biggest casualties of the Federal Reserve’s aggressive rate-hiking cycle. They were trading at $70 and $106.04, respectively, before they were taken over by regulators.
What makes their situation unusual is that the threat of bankruptcy—or government shutdown—wasn’t reflected in their stock prices at the time of their collapse. Shares of Avaya Holdings Corp. and Party City Holdco Inc., for example, were trading below $1 in the weeks before the companies formally filed for bankruptcy earlier this year.
Brokerages appear to be valuing the shares at starkly different levels. Fidelity, for one, has marked the shares at zero. Charles Schwab Corp. has put Signature at $64.60 and SVB at $39.25.
Another complicating factor is there is no historical playbook for the brokerages to refer. The options mania that characterizes today’s markets wasn’t a fixture during the last round of bank failures a decade ago. Social media’s role in investing has grown over the same period. Traders who like to swap tips on Twitter or Reddit are turning to those platforms to air their frustrations, in this case.
Mr. Mandia says he bought puts tied to Signature Bank this month that would pay out if the stock dropped to $65 within days. Following the bank’s failure, Mr. Mandia called Robinhood to exercise his puts, and the brokerage initiated a short position in the stock for him to close the trade.
Yet a broker told him that if his positions exceeded its “risk threshold," it could close them. Mr. Mandia then deposited more than $20,000 into his Robinhood account to keep the short position, snapshots of his account show—enough cash to purchase the shares underlying the options at the last closing price. He is now short Signature Bank shares and waiting to close out the position when the shares start trading.
A spokeswoman for Robinhood said the firm allowed clients,such as Mr. Mandia, whose options expired March 17 to exercise their contracts and will provide other clients “with details as we get closer to their expiration date."
Robinhood values SVB at $39.40, where it last traded premarket on March 10, before the shares were halted,a spokeswoman said. Meanwhile, it puts Signature Bank shares at $70, their last closing price. Brokers’ different approaches in marking the shares can influence how much collateral traders need to post for the positions.
Scott Sheridan, chief executive of the brokerage Tastytrade, said his firm prefers clients post enough cash to purchase shares in the open market after exercising the puts.
That is in part because of the uncertainty surrounding where the stocks will eventually trade, he said, pointing to situations such as the 2021 meme-stock mania when a handful of stocks soared with little regard for fundamentals. In another noteworthy case, individual investors piled into shares of Hertz Global Holdings Inc. after it filed for bankruptcy, hoping to ride them higher, despite the fact that shareholders are typically wiped out during such restructurings.
“It’s more of an art than a science," Mr. Sheridan said. “We are looking at each account on a case-by-case basis. We have to balance customer satisfaction with firm risk."
Andrew Bissell, a 39-year-old engineer, said he had a hunch things would take a turn for the worse for Signature Bank, so he scooped up several put options that would profit if the bank’s shares tumbled. The puts gave him the right to sell shares at $50, $55 and $65, snapshots of his brokerage statement show.
Mr. Bissell said he placed multiple calls to his brokerage firm E*Trade, part of Morgan Stanley, after the government rescue and contacted the central options clearinghouse, Options Clearing Corp., to exercise his options. The brokerage told him he would need to post more cash.
At one point, he says he reached out to his parents to take out a $100,000 loan to deposit in his brokerage account to exercise the contracts. Eventually, the firm said he didn’t need to post that much cash for the trade, which he estimated could earn him tens of thousands of dollars. He posted enough cash to buy the shares in the open market and has since completed the trade.
