Options Update: Fifth Third Bancorp Searches for Support in Financial Storm
The financial sector is besieged on all sides this week, with Citigroup
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PowerRating) debating putting itself on the auction block, KeyCorp
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PowerRating) cutting its dividend, and J.P. Morgan Chase
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With the sector in turmoil, it should come as no surprise that options traders are piling into puts on financial stocks. One such company attracting a particularly heavy load of put volume today is Fifth Third Bancorp
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PowerRating).
The speculative options community has favored FITB put options for a while, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.99 indicates that puts nearly double calls among near-term options. Furthermore, this ratio ranks above 84% of all those taken during the past year. Looking at our Intraday Volume Explosion List, it would seem that investors are continuing this trend today, as more than 19,000 puts have changed hands on the security so far. This wealth of activity has easily outpaced FITB’s average daily put volume by more than 5 to 1.
The most active contract is the December 5 put, which has seen more than 10,000 contracts trade on open interest of 13,039. With volume falling just shy of open interest, it is initially unclear whether today’s activity represents the initiation of fresh positions. That said, the fact that nearly all of the December 5 put volume changed hands at the ask price suggests that the contracts were, in fact, bought to open.
The Anatomy of a Fifth Third Bancorp Put Position
Digging into this put-buying activity, I noticed that 1 block of 10,000 contracts changed hands at 11:04 a.m. Eastern time at the ask price of $0.80. The total outlay for this position would be $800,000 — ($0.80 * 100)*10,000 = $800,000. For this trade to reach break even, FITB would need to fall about 45 % to $4.20 per share from yesterday’s close at $7.71 before the options expire on December 19. The maximum loss on this position is limited to the initial investment of $800,000.
By entering this trade, the investor is indicating that he expects FITB to steadily decline during the next several weeks. The shares are off to a solid start, falling about 15% so far today. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.
Getting Technical
From a technical perspective, the stock has dropped more than 69% on a year-to-date basis, easily out pacing the S&P 500 Index’s (SPX) loss of more than 48% for the same time frame. Furthermore, the shares have even underperformed their sector peers in the Select Sector Financial SPDR (XLF) on a relative strength basis since early August. During this time frame, FITB has battled overhead resistance at its 10-day and 20-day moving averages while clinging to support at the 8 level. However, this key region of support gave way amid yesterday’s broad-market sell-off, opening FITB up to heavier losses as the shares search for another baseline of support.
The Sentiment Drivers
As you would expect, investors have reacted quite negatively to FITB’s poor price action. Short interest accounts for more than 9% of the stock’s total float, despite a 4.4% decline during the most recent reporting period. FITB bulls should note that the shares continued to decline, despite the added buying pressure from the short-selling crowd.
Elsewhere, Wall Street analysts are decidedly bearish toward FITB, as Zacks.com reports that 10 of the 15 brokerage firms following the shares rate them a “hold” or worse. Normally, I would view this bearish skew toward the shares as a potential boon for FITB. However, with the financial sector in tatters and little for analysts to cheer about, it could be some time before we see a shift in sentiment toward the security from the brokerage community.
The Verdict?
It seems clear that the current government bailout of the financial system has not boosted confidence in the sector. With investors’ confidence in financial stocks continuing to fall, it appears that the recent selling pressure levied against FITB could continue for some time. Combine this with the lingering optimism among Wall Street analysts, and the shares could be poised to fall deeper into single-digit territory.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.