Capital markets giant Jefferies Financial Group (JEF) is up 49% over the past year, far exceeding the returns on the S&P 500. One trader sees shares pulling back over the coming months.
That’s based on the December $50 puts. With 134 days until expiration, 6,000 contracts traded compared to a prior open interest of 186, for a 32-fold rise in volume on the trade. The buyer of the puts paid $2.40 to make the bearish bet.
Jefferies shares recently traded for about $54.50, meaning shares would need to drop about 9% for the option to move in-the-money. The stock has recently come off a 52-week high of $59.30.
The financial institution is having a stronger year operationally. Revenues have jumped 60%, and earnings are up an impressive 1,187%. That year-over-year strength looks set to decline, which could weigh on shares over the coming months.
Action to take: While shares are attractive at less than 13 times forward earnings, market fears could push prices lower in the coming weeks.
Today’s investors can get a 2.7% dividend, but over the past 5 years, the yield has averaged 2.9%. If the price drops low enough for a 2.9% yield again, it may be time for investors to buy.
For traders, the December $50 puts are well positioned for more market weakness in the months ahead. Such weakness will likely end by the time the election is over, so traders should be able to exit the trade well before expiration.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.
