Regional bank PacWest Bancorp (PACW) has been trading in a range over the past few months. One trader sees shares trending to the higher end of that range in the weeks ahead.
That’s based on the August $8 calls. With 41 days until expiration, 7,114 contracts traded compared to a prior open interest of 283, for a 25-fold rise in volume on the trade. The buyer of the calls paid $1.02 to make the bullish bet.
Shares recently traded just under $8, making this an at-the-money trade. During the panic selloff in bank shares earlier this year, PacWest traded as low as $2.48.
PacWest trades at just under half its book value, and last went for about 6 times earnings.
Action to take: Shares are undervalued relative to the bank’s assets, and could potentially move higher. The bank did cut its dividend to a penny per quarter in the spring, so shares only yield 0.5 percent right now. However, that could increase over time as the fears in the space subside.
For traders, shares are likely to be stuck in a range for a while longer. However, given the lack of a new banking crisis, the stock should trend over time, which could lead to mid-double-digit returns or better for the calls.
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.