Shares of Brazilian bank Nu Holdings (NU) have been in a steep downtrend since the company went public late last year. One trader is betting on a further decline in shares.
That’s based on the June 17th $2 puts. With 32 days until expiration, 3,758 contracts traded compared to a prior interest of 112, for a 34-fold increase in volume on the trade. The buyer of the puts paid $0.18 to get into the trade.
Shares of the bank recently traded around $4.00, so they would need to decline by half in the next month in order for the option to move in-the-money. That’s a steep move, but given the company’s 68 percent decline already since going public in December, it’s potentially possible.
Revenue at the bank rose by nearly 200 percent last year, but the firm still managed to lose money with a negative 20 percent profit margin.
Action to take: Even with the recent drop, shares trade for 3.8 times their book value. A better play is to buy banks trading at or under their book value. And the company doesn’t pay a dividend at this time. So buyers will want to hold off until the company’s outlook improves.
For traders, the short-term put is inexpensive, and could deliver high-double to low-triple-digit returns, especially if markets continue to trend down in the next month until expiration. That makes for an attractive downside hedge now.
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.