Regional bank Keycorp (KEY) is down nearly 40 percent over the past year, as banking stocks have been out of favor with the market. One trader sees the potential for another big drop by the end of the year.
That’s based on the December $6 puts. With 184 days until expiration, 5,128 contracts traded compared to a prior open interest of 195, for a 26-fold rise in volume on the trade. The buyer of the calls paid $0.40.
Shares recently traded for about $10, so a drop to $6 would mean a decline of $4, or a 40 percent drop in price from here. That strike price is well under the stock’s 52-week low of $8.53.
It’s possible that bank stocks move lower in the coming months. Keycorp isn’t the worst-performing player here, and shares only trade at a discount of about 15 percent to their book value. Some smaller banks trade even further down.
At current prices, shares go for about 7 times forward earnings. And Keycorp has maintained its dividend, which is currently at about 7.7 percent.
Action to take: Shares look undervalued here, but a further bank failure could lead to another leg lower for shares. Investors can still be patient with the trade and look for a buying price closer to the 52-week low.
For traders, the December $6 puts may not move in-the-money, but would be a great hedge from any further problems in the banking sector in the coming months. That could lead to triple-digit returns.
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.