Regional bank
PacWest Bancorp (PACW) has seen shares drop 80 percent over the past year as a banking crisis has unfolded. Shares are volatile on a daily basis, and one trader sees the stock moving lower in the weeks ahead.
That’s based on the July 21 $4 puts. With 51 days until expiration, 18,843 contracts traded compared to a prior open interest of 246, for a 77-fold rise in volume on the trade. The buyer of the puts paid $0.70.
Shares recently traded just over $7, so they would need to fall by $3, or about 42 percent, for the option to move in-the-money. During the initial bank crisis, shares hit a low of $2.48, so such a move is possible.
The recent drop has taken PacWest to a quarter of its book value, or the measure of the loan portfolio on its books. The question bothering investors in the banking space right now is the duration risk of the bank’s investment portfolio.
Action to take: Shares are probably undervalued, but could be susceptible to a larger percentage drop on any market fear in the coming weeks. That bodes well for trades against shares right now, and long-term investors should look at larger banks that haven’t sold off as much as PacWest.
For traders, the July puts are inexpensive, and could be a triple-digit winner, particularly on any bank fears in the coming weeks. The puts may also be a reasonable market hedge here.
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 of the companies mentioned in this article.
