Investment brokerage firm The Charles Schwab Corporation (SCHW) has lost about a quarter of its value in the past year, as slowing trading has reduced revenues. One trader sees the potential for a further decline in shares in the weeks ahead.
That’s based on the June 2 $40 puts. With 35 days until expiration, 12,066 contracts traded compared to a prior open interest of 216, for a 56-fold rise in volume on the trade. The buyer of the puts paid $0.32.
Shares recently traded just around $50, so the stock would need to fall $10, or about 20 percent in just a few weeks. And they would need to drop under their 52-week low of $45 per share.
Such a move is possible. Shares were trading over $75 before fears hit the banking sector, causing the drop to the $50 range. Any renewed fears could lead to another big swing lower.
Action to take: Shares trade at 14 times earnings, and the stock yields about 2 percent. But we don’t have an all-clear for the space yet, and the brokerage won’t report its next earnings until July.
Investors may not know how the company’s deposit levels are holding out for months. So for now, it’s a stock to avoid.
For traders, the June $40 puts are aggressive. But they’re inexpensive.
If they don’t pan out, traders won’t lose out on much. But if there’s a big drop lower in financial stocks in the coming weeks, the trade could make a great hedge with high-double-digit return potential or better.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.