Signature Bank (NASDAQ:SBNY) investors got some news yesterday that should be considered a major victory. Since the company collapsed last week after the Silicon Valley Bank meltdown, bank stocks have struggled to regain investor confidence. One major casualty of the crisis was Signature Bank, seized by government regulators on the grounds that it posed a “systemic risk.” Before trading ceased, some investors purchased short-dated options on SBNY stock, eyeing the potential for significant gains if the crisis continued escalating. Popular digital broker Robinhood (NASDAQ:HOOD) had initially threatened to let contracts taken out over its platform expire before the issuing of payouts. However, the company has made an exception regarding Signature Bank options.
What’s Happening With SBNY Stock
It’s no surprise that short sellers target SBNY stock. As the run on Silicon Valley Bank last week quickly sent bank stocks into free fall, investors wondered just how bad things could get. Nasdaq responded by halting trading on several bank stocks, SBNY among them. While most of these halts didn’t last long, the apparent carnage signaled an opportunity for short sellers looking to profit from the turbulent market events. Robinhood’s policy is not to allow short-selling on its platform, which ultimately posed a threat to the short-sellers holding lucrative options against SBNY stock. However, the company has opted to make an exception following significant pressure. Per the Financial Times:
“Until its U-turn, the broker had told its customers that the suspension of the bank’s shares after its collapse, coupled with its own bar on short selling, meant many contracts could not be honoured and would expire worthless on Friday. But in an email on Thursday morning, Robinhood offered to let customers keep their positions open.”
As the outlet also notes, many investors held “put” options on SBNY stock, ensuring them the right to sell shares by a specific date but with no direct obligation. If shares prices fell, these investors stood to reap significant rewards, and even before the SVB crisis brought down the banking sector, things were looking rocky for Signature Bank. The company had been facing a probe from the Securities and Exchange Commission (SEC) due to its clients in the crypto space and potential money laundering allegations. Even if the Silicon Valley Bank collapse hadn’t brought it down, SBNY stock would still likely be falling. It very much fits the bill of a tempting short-seller target.
What Comes Next
Per the Financial Times, Robinhood has “previously said it would only honour the trade if customers already owned the shares in their account and had used the put option as insurance against potential losses.”
However, it makes sense that the platform would cave to intense short-seller anger, particularly as competitors, including Interactive Brokers Group (NASDAQ:IBKR) and Fidelity, already allow investors to maintain open positions past their expiration date. Sellers holding in-the-money options had too much on the line to simply sit by and do nothing while missing out on significant profits.
The dust is still settling from the SVB collapse, and many investor questions remain unanswered. But things seem to have worked out well for the investors who held these lucrative options on SBNY stock.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
