Bank Stock Alert: Robinhood Backs Short Sellers of Signature Bank (SBNY) Stock

Signature Bank (NASDAQ:SBNY) investors received news yesterday that should be seen as a major win. Since the company collapsed last week following the collapse of Silicon Valley Bank, bank stocks have struggled to regain investor confidence. One of the main victims of the crisis was Signature Bank, seized by government regulators on the grounds that it posed “systemic risk”. Before trading ended, some investors bought short-term options on SBNY shares, eyeing the potential for big gains if the crisis continued to escalate. Popular digital broker Robin Hood (NASDAQ:HOOD) initially threatened to let contracts taken out on its platform expire before payments were issued. However, the company made an exception regarding Signature Bank options.

What’s going on with SBNY stocks

It’s no surprise that short sellers are targeting SBNY stocks. As the race for Silicon Valley Bank last week sent banking stocks rapidly plummeting, investors wondered just how bad things could get. The Nasdaq responded by halting trading in several bank stocks, including SBNY. While most of these stops did not last long, the apparent carnage signaled an opportunity for short sellers looking to profit from turbulent market events. Robinhood’s policy is not to allow short selling on its platform, which ultimately posed a threat to short sellers holding lucrative options against SBNY stock. However, the company chose to make an exception following significant pressure. Speak FinancialTimes:

“Until its U-turn, the broker had told clients that the suspension of bank shares after its collapse, coupled with its own ban on short selling, meant that many contracts could not be honored and would expire. worthless on Friday.But in an email Thursday morning, Robinhood offered to let clients keep their positions open.

As the outlet also notes, many investors held “put” options on SBNY stock, guaranteeing them the right to sell stock on a specific date but with no direct obligation. If stock prices fell, these investors stood to reap significant rewards, and even before the SVB crisis brought down the banking industry, things looked tough for Signature Bank. The company had faced a Securities and Exchange Commission (SEC) investigation due to its crypto clients and potential money laundering allegations. Even if the Silicon Valley Bank collapse hadn’t brought it down, SBNY stock would likely still be down. That fits the bill perfectly for a tempting target of short sellers.

What happens after

Speak FinancialTimesRobinhood has “previously stated that it will only honor the transaction if customers already own the shares in their account and have used the put option as insurance against potential losses.”

However, it makes sense that the platform would give in to intense anger from short sellers, especially as competitors including Group of interactive brokers (NASDAQ:IBKR) And loyalty, already allow investors to maintain open positions past their expiration date. Sellers who held in-the-money options had too much at stake to simply sit idly by and miss significant profits.

The dust has settled again since the collapse of the SVB and many questions from investors remain unanswered. But things seem to have worked out well for investors who held those lucrative options on SBNY stock.

At the date of publication, Samuel O’Brient held (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.