“You’re thinking of this place all wrong, as if I had the money back in a safe. Your money’s in Web3 innovations, it’s in startups empowering women” —Delicious Tacos,riffing on the bank run scene in “It’s a Wonderful Life”.
Betting Against Another Bank
In a trade alert last week (Betting Against Another Bank), we discussed the bank crisis and how regional banks were under pressure due to deposit flight.
We identified First Republic Bank (FRC) as a bank with a high percentage of depositors above the $250k limit, and we placed bets against it by opening two put spreads, anticipating a drop in stock price after earnings.
Our Bets Pay Off
As it turns out, we were right. FRC announced during its earnings call after the close on Monday that its deposits had dropped by more than 40% in the first quarter.
As expected, this news led to sharp decline in FRC’s share price, with the stock dropping nearly 50% on Tuesday.
Our first put spread, which involved buying the $14 strike puts and selling the $13 strike puts expiring on April 28th for a net debit of $0.55, will leave us with a net credit of $1 at expiration, assuming FRC shares stay below $13 by then (they closed at $8.10 on Tuesday), earning us an 82% gain. Our second put spread, which consisted of buying the $13.50 strike puts and selling the $13 strike puts expiring on April 28th for a net debit of $0.25, we leave us with a net credit of $0.50 at expiration, resulting in a 100% gain.
Our attention to the bank crisis, deposit flight, and FRC’s potential vulnerability positioned us to profit from these trades. We’ll continue to keep our eyes open for more opportunities like this. If you’d like a heads up next time we enter one, feel free to sign up for our Substack/occasional email list below.