Trade Alert: Betting Against Another Bank

After our successful bets against First Republic.

Los Angeles’s Far East Bank gets a large, unscheduled withdrawal (Heat, 1995).

The Last Days of First Republic

Last week was a good one for our bets against banks, with our two earnings bets against First Republic Bank ( FRC 0.00%↑ ) cashing for gains of 80% and 92%, respectively. We placed our third bet against First Republic on Thursday, buying $3 strike, July expiration puts on FRC at $1.36.

Early this morning, First Republic was taken over by JPMorgan Chase & Co. in a fire sale arranged by the FDIC. First Republic’s bonds are down ~95%, suggesting its equity will be worthless (its shares are currently halted), and we should be able to sell our puts for a >100% gain.

I can’t promise this next bet against a bank will cash as quickly, but on a number of metrics, the bank I bet against today looks worse than First Republic did before it released earnings last week.

First Republic A Week Ago

Here are some metrics on First Republic before it released earnings last Monday, when its bigger-than-expected drop in deposits led to its death spiral:

• Piotroski F-Score: 0 (remember, scores below 2 indicate financial distress).

• Overall fundamental rating: 3 (on a scale from 0-to-10)

• Relative Strength: 22.4

• Overall technical rating: 0 (on a scale from 0-to-10).

• Failed Portfolio Armor’s gauge of options market sentiment.

And here’s how the new bank we bet against compares now:

• Piotroski F-Score: 0

• Overall fundamental rating: 2

• Relative Strength: 22.14

• Overall technical rating: 0

• Failed Portfolio Armor’s gauge of options market sentiment.

The trade we opened on this bank offers nearly 8x more potential upside than potential downside. Details below

The bank holding company is Fulton Financial Corporation ( FULT 0.00%↑ ), and this is my trade:

A vertical spread expiring in September buying the $10 strike puts and selling the $7.50 strike puts for a net debit of $0.28. The max gain on 10 contracts is $2,220 and the max loss is $280, and the break-even is with FULT trading below $9.72.