Bank Stocks Collapsing: What Will Happen with My Bank Stock Options

Bank Stocks Collapsing: What Will Happen with My Bank Stock Options?

By:Nick Battista

The banking system was shocked over the weekend after the failure of $SIVB and $SBNY and the ensuing takeover by the FDIC. Regulators took over both banks and ensured depositors access to funds, and setting up new facilities for emergency funds – a relief to customers which had funds above the FDIC limit of $250,000. Small businesses and customers will be made whole while shareholders will be wiped out – a major difference from past “bailouts”.

Bank Stocks: What Happened?

Over the last couple years liquidity has flooded the market, and thus bank deposits have increased significantly. With this increase in liquidity, banks decided to park funds in longer duration bond assets as rates rose – "risk free” assets with yields but with maturities many years in the future. As rates continue to rise, these bonds lose value based on mark to market value. Essentially, these banks were short the front of the yield curve (short term liquidity) and long the tail (long duration yields) as the curve of yields continued to steepen. Couple that with declining asset/investment values and customers withdrawing funds to chase higher yielding assets, and you get a liquidity driven meltdown.

What Will Happen to Options Positions in These Bank Stocks?

The OCC will likely chime in on settlement procedures soon. Currently, the options for $SIVB and $SBNY are halted, options cannot be opened or closed. Options CAN, and likely will be exercised/assigned. If the OCC moves these stocks off the automatic exercise list, options will have to be requested to exercise. In this case, long option holders will have to request the option be exercised prior to expiration.

Sivb and Sbny Stocks: Where Next?

If $SIVB or $SBNY are bought out by another bank, the options will settle based on the cash settlement value of the stock. Meaning, if the stock is bought for $1 per shares, a $50 strike in the money put option would settle at $49 in cash. All out of the money options would expire worthless.

Has the contagion been stopped? Or is this just the tip of the iceberg? Let me know your thoughts on twitter @tradernickyBAT

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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