January 23, 2015 / 8:27 PM / 6 years ago

FXCM options activity surges after Swiss shock

NEW YORK (Reuters) - Losses from the surprise move by the Swiss National Bank nearly crippled brokerage FXCM FXCM.N, but all the attention has resulted in a surge of activity among options traders on the online forex broker.

Swiss one franc coins are seen in this illustration picture taken in Zurich January 19, 2015. REUTERS/Arnd Wiegmann

FXCM’s shares fell nearly 90 percent on Tuesday after the company faced $225 million in losses on the SNB’s shock decision last week to remove the cap on the Swiss franc. It then agreed to an emergency loan from Leucadia National Corp LUK.N.

The loan kept FXCM from falling short of regulatory requirements that could have kept it from operating. The shares, which touched a low of $1.28 on Tuesday, have recovered slightly, though on Friday they were down 31 percent at $2.14 in active trading on the New York Stock Exchange.

The drastic drop in the price of the shares has spurred a surge of interest in both the stock and its options, with some hoping for a buyout for FXCM.

“The action in the underlying stock has been highly speculative and now it’s moved to the options market,” said Ian Bezek, an independent trader based in New York.

Recent trading appeared to be driven by speculative call buying, said Fred Ruffy, options strategist at WhatsTrading.com.

Options trading in FXCM shares had been sparse, averaging less than 15 contracts a day last year. The volume has now exploded and since Tuesday has averaged more than 50,000 contracts a day.

“The stock suffered such a big sell-off that the logic might be: ‘Well, if it recovers even 20 percent of the losses, that translates to a substantial move higher from current levels,’” Ruffy said.

Meanwhile, short sellers have jumped at the chance to open new positions in FXCM this week, data from SunGard’s Astec Analytics shows.

Following the Swiss central bank’s move, borrowing of FXCM shares jumped 29 percent in just two days and latest figures show short sellers are betting on more declines, Karl Loomes, market analyst at SunGard’s Astec Analytics said.

Difficulty in borrowing FXCM shares is another factor that may be driving up activity in the options market. Traders tend to use options to express a short bias when shares are hard to borrow.

Puts, which carry the right to sell the shares at a specified price in the future, and can be used to make bearish bets on the stock, were popular on Friday with volume of 17,000, or about 20 times the normal amount, according to Trade Alert data.

“I’d normally just short the stock, but it is difficult to borrow,” said Bezek, who is currently short 22 FXCM calls at the $2.50 strike that expireS on Feb. 20.

On the other side of the trade, Shiv Kapoor, a Levittown, New York-based trader who owns 20,000 FXCM shares which he bought at $1.50, said the stock looks attractive as a possible buyout candidate or if it remains independent.

A buyout, however, might not be very lucrative for FXCM shareholders, given the terms of the loan from Leucadia.

“We believe 95 percent of the economics of a sale with proceeds up to $1.33 billion would go to Leucadia and debt holders, suggesting only 5 percent remaining for FXCM shareholders,” said Citi Research analysts, who have a 75 cent price target on FXCM shares, in a note on Friday.

Reporting by Saqib Iqbal Ahmed; Editing by Chizu Nomiyama

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