SVB debacle sparks rush to defensive options on fears of contagion

FS KKR Capital

10/03/2023 18:41

By Saqib Iqbal Ahmed
       NEW YORK, March 10 (Reuters) - Traders piled in to
defensive options on bank stocks on Friday, a day after a tumble
in the shares of SVB Financial Group  SIVB.O  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 ETF  KBE.P , 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  UBS.N , Bank of New York Mellon
Corp  BK.N  and Charles Schwab  SCHW.K , as well as smaller
names such as Ally Financial  ALLY.N  and Ares Capital  ARCC.O .
    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.
    SVB's troubles piled further pressure on the sector already
hurting from a more than 80% slide in Silvergate Capital's
 SI.N  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. 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
GRAPHIC-SVB collapse a sign of pain coming from end of easy-cash
era     urn:newsml:reuters.com:*:nL1N35I1VA
Banking regulators close SVB, move quickly to avert crisis   
 urn:newsml:reuters.com:*:nL8N35I3YV
INSTANT VIEW 3-SVB meltdown triggers gyrations in global bank
shares      urn:newsml:reuters.com:*:nL1N35I1PB
BREAKINGVIEWS-Big bank selloff rests on tiny kernel of truth   
 urn:newsml:reuters.com:*:nL4N35I2NX
ANALYSIS-California tech bank SVB sows global fear about rising
cost of money     urn:newsml:reuters.com:*:nL1N35I1VC
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Saqib Iqbal Ahmed in New York
Editing by Ira Iosebashvili and Matthew Lewis)
 ((saqib.ahmed@thomsonreuters.com; @SaqibReports; +1 332 219
1971; Reuters Messaging:
saqib.ahmed.thomsonreuters.com@reuters.net))