By Saqib Iqbal Ahmed
NEW YORK (Reuters) - Traders piled in to defensive options on bank stocks on Friday, a day after a tumble in the shares of SVB Financial Group sparked worries over the lender's stability and fueled a rout in the sector.
A California regulator shut Silicon Valley Bank on Friday and appointed the Federal Deposit Insurance Corporation as receiver, according to the agency's statement. The shares were halted on Friday after tumbling as much as 66% in premarket trading.
With many stocks in the sector falling sharply on Friday, traders rushed in to defensive bets. The 30-day implied volatility on shares of the SPDR S&P Bank (NYSE:KBE) ETF, a measure of how much traders expect its shares to swing in the near term - jumped to a 1-year high of 44%, data from options analytics firm Trade Alert showed.
Investors also splurged on defensive options contracts in a wide range of financials in the last two sessions, including heavyweights such as UBS Group, Bank of New York Mellon (NYSE:BK) Corp and Charles Schwab (NYSE:SCHW), as well as smaller names such as Ally Financial (NYSE:ALLY) and Ares Capital.
Though SVB's troubles for now appear idiosyncratic to the firm, traders appeared on guard for the possibility that they could bode poorly for the broader sector as a campaign by the Federal Reserve to fight inflation by ending the era of cheap money is exposing vulnerabilities in the market.
"With fear of contagion in the regional banking sector, there was a slew of put buying in financials mostly using the options to protect against an about 10% decline in the underlying (shares)," said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
Puts offer the right to sell shares at a fixed price in the future and are typically used by traders looking to guard against a drop in stock prices.
Shares of SVB, whose operating segments include Silicon Valley Bank, slumped over 50% on Thursday after the company announced a $1.75 billion share sale late the previous day. SVB is battling cash burn due to declining deposits from startups struggling with a venture capital funding drought.
SVB's woes also knocked the banking sector on Friday as investors worried that more banks would incur heavy losses on their bond portfolios. Traders appear to expect the sector to remain volatile for some time. While most of the trading was concentrated in March through May expirations, some longer-dated trades extended out into the summer, Murphy said.
"Investors have re-rated banks on a sectoral basis, initiated a huge flight into the safety of short-term (Treasury) notes, and options pricing reflects those fears," said Steve Sosnick, chief strategist at Interactive Brokers (NASDAQ:IBKR).
SVB's troubles piled further pressure on the sector already hurting from a more than 80% slide in Silvergate Capital (NYSE:SI)'s shares as the cryptocurrency-focused lender reels from losses following the collapse of crypto exchange FTX.
While investors had largely shrugged off Silvergate’s troubles as strictly crypto-related, "(SVB Financial Group) was a giant wake-up call about the effects of rising rates and an inverted yield curve," Sosnick said.