Option Traffic Signals Jam for UBS and Other Banks


If the options market is any indication, investment bank stocks could still be in for a rough ride in the month ahead, particularly UBS, according to Rebecca Darst of Interactive Brokers.

"Option traders are pricing-in about 40 percent more price risk to UBS shares over the next month than they have shown historically," she said in an interview on CNBC's "Squawk Box."

She pointed to the activity in "put" options on the stock , where traders buy the right to sell a stock at a certain time at a certain "strike" price. Such options typically pay off when a stock plunges in price.

Options Action

"The April 25 puts are the strike to watch here with UBS.  They continue to attract buyers.  These were bought yesterday for around $2.45, so, in order to break even, we need to see a test below the standing 52-week low for UBS, and that's going to put the bank shares right at around five-year lows."

Similar activity is evident in other brokerages as well, she said, despite earnings reports earlier in the week made some believe the worst is over in the financial sector.

"There continues to be a high degree of speculative volume in these brokerages, having these somewhat reassuring numbers out of Lehman , Goldman , and Morgan Stanley has not completely abated this speculative two-way traffic," she said.

And Bear Stearns , despite what many think will be a set deal with JPMorgan , is seeing option activity as well, Darst said.

"What's interesting is that we're seeing buyers pile into the sort of $5 puts in Bear Stearns, and this is the March contract we're talking about, so these are the ones that expire today," she noted.  "The $5 puts in Bear Stearns and the $10 calls, I would not at all be surprised to see people going long both those positions in what's known as a 'strangle.' That costs you only about 35 cents, but will cover you in the unlikely event of a break past $10.35 to the upside or down below $4.65 to the downside."

(See Darst's Full Interview in the Accompanying Video)