Stock options worth hundreds of millions of dollars tied to failed lenders SVB Financial Group and Signature Bank are reaching expiration Friday with no certainty whether or how they can be cashed in.
(Bloomberg) — Stock options worth hundreds of millions of dollars tied to failed lenders SVB Financial Group and Signature Bank are reaching expiration Friday with no certainty whether or how they can be cashed in.
Shares of both institutions are no longer trading following their collapse this week, throwing into doubt the ability of in-the-money options holders to exercise those contracts. In other words, traders who bet on stock declines — correctly, since shares in both lenders plunged before their collapse — may struggle to collect profits.
There are about 7,660 put options on SVB Financial worth a notional $114 million due to expire Friday and another 22,347 worth $178 million on Signature, according to Bloomberg calculations based on the last trading session for each stock. Assuming the banks’ shares are now worthless, they all represent winning bets.
The Options Clearing Corp., which provides clearing and settlement services for derivatives, announced Tuesday that its usual process of automatically exercising options would not happen for contracts tied to Signature and SVB. That’s because when shares aren’t trading, there’s 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 underlying security value, which is sufficient to determine exercise decisions,” the OCC said in a memo.
It all means, as a first hurdle, options holders will have to specifically instruct their brokers if they want to exercise the contracts. Given the valuation issue and trading halt, it’s unclear how many holders will opt to do so — and if they do, how easily the transactions can settle.
“I’ve been fielding a lot of the questions about these options,” said Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives. “Everyone who’s involved, institutional players, everyone who’s been long these puts have been coming to me with questions. They were just nervous, ‘What do I do?’”
The fate of most options will be tied to where the shares are valued, he said, but “where it’s marked and whether they’ll be monetized, nobody knows.”
Angry Holders
The buyer of a put option has the right, but not 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.
Based on the latest options data update, the highest open interest in puts on Signature Bank due Friday is at a strike price of $50 per share. So the traders who sold those contracts — and collected a premium upfront — are now obligated to buy the stock at that price — assuming they didn’t hedge their positions — even though the market value may have tumbled all the way to zero.
Major brokers such as Interactive Brokers, Schwab Corp. and TD Ameritrade Holding Corp. have indicated they will let options holders exercise their contracts, though it remains unclear if and how they will be able to.
“We’re likely going to see a lot of confusion,” said Brent Kochuba, founder of options platforms SpotGamma. “It’s unlikely going to be a smooth process.”
Robinhood is allowing some customers holding profitable positions on Signature Bank to keep their position beyond Friday’s expiration date, the Financial Times reported, citing an email from the firm.
With no obvious resolution in sight, angry options holders have taken to Reddit and Twitter to vent their frustration, with some even setting up a website — SBNYputs.com — to air their grievances at apparently being unable to exercise their contracts.
Margin Risk
Even if some put holders do manage to exercise their options, without an updated value no one can say for certain which contracts are in-the-money. A potential solution to the valuation issue would ultimately be for the banks’ stocks to get listed in the over-the-counter market, according to Kochuba.
Meanwhile, margin risk is adding a further complication, according to Steve Sosnick, chief strategist at Interactive Brokers. That’s because the amount of collateral a trader needs to deposit in an account is tied to the last closing price of the underlying stock.
For SVB that was $106.04, and for Signature it was $70. In other words, even if a trader sold a $30 put on SVB, they’d still need to have sufficient funds in the account to cover the position as if it was valued at $106.04.
“You may find yourself in margin deficit as the short position is immediately marked to the last traded price,” Sosnick said. “And that position will persist until the Depository Trust Company or the Options Clearing Corp. make a determination of the final value. That could take some time.”
–With assistance from Bre Bradham.
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