Some option players hedge bets in Wells Fargo, SunTrust
By Doris Frankel
CHICAGO, Aug 25 (Reuters) - Some bearish option players are betting that Wells Fargo & Co (WFC.N) and SunTrust Banks Inc (STI.N) could both lose as much as 10 to 15 percent of their current stock values by October options expiration.
Nagging worries about the credit markets on Monday have been slamming financial stocks, including banks and brokerage firms.
"We are seeing some limited speculation based on put spreads going up in SunTrust and Wells Fargo showing that investors are still nervous about earnings, potential failures and other industry events," said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.
Wells Fargo shares fell 54 cents to $28.82 and SunTrust dropped $2.09 to $40.62 in afternoon trade on the New York Stock Exchange. Citigroup on Monday assumed coverage of SunTrust with a sell rating.
It appears that small hedge funds are buying put spreads in both SunTrust and Wells Fargo. "And what is interesting about this is that they are not buying puts outright but rather hedging their positions," said Jon Najarian, a founder of Web information site optionmonster.com.
These are not the bankruptcy bets seen last March in Bear Stearns. These are hedged bets that Wells Fargo and SunTrust shares will move lower, perhaps 10 to 15 percent from their respective current stock prices, Najarian said.
A bear put spread is the simultaneous purchase of a put option with a higher strike price and the sale of another put option with a lower strike price.
Investors often use bear put spreads if they anticipate a decline in the stock price and are less costly since they reduce the cost of buying outright puts, which allow investors to sell the stock at a given time and price.
In Wells Fargo, the fifth-largest U.S. bank, a strategist appeared to have bought 4,000 October $29 puts and sold 4,396 October $25 put strikes for a debit of $1.50 a contract, said option strategist Frederic Ruffy at web site Whatstrading.com.
If so, the potential payoff is $2.50 if Wells Fargo falls to $25 a share or less by October options expiration, he said.
The focus centered on the $40 and $35 October put options in U.S. southeast regional bank SunTrust where more than a total of 10,000 contracts traded.
Similar to Wells Fargo, the action appeared to be a bearish spread as one trader or a group of traders bought the $40 strike price and sold the $35 strike price. The spread would generate its maximum profit if SunTrust shares dropped to $35 or less by October expiration, Ruffy said. (Reporting by Doris Frankel, Editing by Chizu Nomiyama)
