On paper, SoFi Technologies (NASDAQ:SOFI) should be storming higher. Leveraging incredible popularity among retail investors, the company delivered better-than-expected third-quarter earnings results. Also, it expects to post its first-ever profit in Q4. Nevertheless, SOFI stock slumped on Thursday amid broader concerns impacting the underlying financial technology (fintech) ecosystem. And that leaves a key options trade hanging as a vulnerability for the bulls.
Late last month, SoFi rang up sales of $531 million in Q3, exceeding analysts’ consensus target of $512.1 million. Driving the revenue spike was higher-than-expected student loan originations. In terms of the bottom line, the fintech posted a per-share loss of 29 cents, wider than the anticipated loss of 8 cents per share. Still, a guided profit in Q4 — against an expected loss of 1 cent — helped mitigate the aftertaste.
Nevertheless, questions have been rising about the fintech industry’s viability. According to The Wall Street Journal, investment in private fintech firms fell 46% globally in Q3. Further, publicly traded fintechs haven’t really picked up the slack. Competitors like Block (NYSE:SQ) and PayPal (NASDAQ:PYPL) have suffered sizable equity losses since the January opener.
Fundamentally, the WSJ points out, high interest rates have been especially hard on fintech lenders because they apply pressure “on the very consumers on the margin who are likely to seek out a fintech lender instead of a bank.”
In fairness, SOFI stock is still up about 51% for the year. Nevertheless, in the trailing month, it’s down 17%.
Open Vulnerability Clouds SOFI Stock
Looking through the news cycle, no apparent company-specific development exists to explain the sharp drop in SOFI stock on Thursday. At time of writing, it’s down more than 7% against the prior session. However, it’s possible that a critical options trade transacted on Nov. 1 leaves the bulls vulnerable to a downwash.
According to Fintel’s options flow screener – which exclusively targets big block trades likely made by institutions – a major entity (or entities) wrote (i.e. sold) 1,605 contracts of the Sept. 20, 2024 $7 put. Based on TipRanks’ historical pricing for this option, open interest (OI) stood at 2,535 contracts on Nov. 1. By the next day, OI jumped to 4,130 contracts.
Also, at the time of the major transaction, the price of SOFI stock in the open market was approximately $7.54. However, since Nov. 2, shares have steadily lost value. Subsequently, the OI of the aforementioned put option increased. This suggests that other options traders bought the put.
Worryingly, the transaction to sell the put was the biggest trade based on sigma or the premium involved in the month so far. In this case, the sigma stood at 3.81 standard deviations above the norm.
Now, because put sellers have the obligation but not the right to fulfill the terms of the contract — that is, to buy SOFI stock at a price higher than the current open market price — it leaves the risk underwriter(s) in a quandary.
In order to protect against losses, the selling party may have to buy puts to cover the initial position. That would likely be bearish for SOFI stock.
Why It Matters
Many analysts remain skeptical about SoFi Technologies. That could stem from the company’s increased credit loss provision. In Q3, this metric clocked in at $22 million, about 38% higher from the $16 million in the year-ago quarter. That may be a signal of management’s concerns about economic viability.
On the date of publication, Josh Enomoto 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.
