Too much text? Scroll to the bottom for the tl;dr.

Alright, here’s the deal. Over the past 10 days the smart money has been bombing in puts in PACW like nobody’s business. 

(We made the pictures big for you so didn’t have to go find your readers — no thanks necessary.)

When this regional bank was trading above $10 per share last week, they were spamming puts at the $9.50 strike expiring this Friday, May 5th, bought for an average of $0.90 per contract. Today, those puts traded for as much as $8.30 per contract — and as you can see, they’ve been doubling down all week.

Today, they took a more tepid approach, rolling those $9.50 strike puts from last week to ITM $4 strike puts. A roll is a “protect the profit” defensive move that means they sold the options that cost a lot for options that cost just a little. 

Now, here’s the interesting thing we’re seeing today though. That move in PACW was pretty defensive. They’re ITM, they’re for tomorrow, they’re ultimately downsizing the trade by a lot. The UOA we’re about to highlight is fresh, from today, and it spits in the face of the “bank failure trade.” We’re calling it the “Fed Cut Hype” trade.

These three sets of bullish spreads were bought in the regional bank ETF (KRE), and they were bought in size. As in, 53,000 spreads purchased in a single day in an ETF that doesn’t always see a lot of action. 

30,000 of these were bought for the May monthly expiration — that’s May 19th. But another 23,000 of these spreads were bought for the July monthly expiration — that’s July 21st. That’s a big deal for an ETF that’s currently down more than 13% on the week

Each of these spreads are a little different, so let’s look at the boldest one — 20,000 call debit spreads expiring May 19th at the $42.50, $44.00 strike.

These spreads offer a max payout of the difference between the two strikes *100. In other words, if KRE is trading at or above $44.00 on May 19th: Good job, you win, collect your $150 per spread.

Here’s the crazy thing: These spreads were bought for an average cost of $0.10 per spread — AKA $10 real life dollars. That means this bet cost roughly $200,000 to make, and pays off at a max of $3M. That’s 15X in 15 days. 

I know what you’re thinking: “It’s a hedge.” And that could be true, but that argument deflates when you look at the activity in the middle. What we’re calling “ratio spreads” are very likely verticals mixed with additional covered calls. It’s likely that this set of three very similar trades made within three hours of each other were made by the same buyer. 

It’s unlikely that this buyer bought 53,000 bullish call spreads and then said, “Hey, I’m going to take a dangerous, infinite-risk naked position opposite mine in 10,000 short calls above my strike!” More likely, those 10,000 calls are covered calls, attached to long shares. Long shares + a massive bet in the options = an unlikely case for a hedge, which in order to be true would require short shares. 

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Too much text? Sorry we couldn’t fit this all into a Tiktok. Here’s the tl;dr:

Why would someone make this trade? 

There’s a lot of reasons why. Maybe they think the bank bearishness is overdone. Maybe they think the Fed and other officials will step in and signal a dovish pivot at the upcoming June meeting. It sounds silly, but the market had originally been pricing in just a 3% chance of a rate cut in June. Now it’s at a 14% chance. 

Despite all of the talking heads on finance TV and FinTwit crying about how “There’s no chance the Fed cuts rates in 2023!” The market has a habit of being right. Whether it’s a self-fulfilling prophecy or the cumulative wisdom of the stock market hivemind, we don’t know, and let’s be clear: We don’t really care. 

We just care that a big, fat trade was made, and we’re inclined to believe that someone dropping hundreds of thousands of dollars in a day really, really thinks they’re going to be right. If you follow that logic, take the trade. If you don’t, then don’t. And if you want more smart money insight every week, where we pick apart themes and trades we’re seeing behind the curtain, then you know where to look:

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