The press release announcing TD Bank Group (TD) and First Horizon Corporation (FHN) had called off their $13.4 billion merger came out at 6:00 AM EST on Thursday.
While not primetime, I suppose they could have released it in the middle of the night when nobody would have read it. Nevertheless, the news had a devastating effect on First Horizon’s share price.
As I write this one hour into the day’s trading, FHN shares are down 39%, with 53.1 million traded, nearly 8x its 30-day average. By the end of the day, we could see its volume eclipse 100 million. It hasn’t reached this kind of volume at any time in 2023.
Strangely, the bank’s options activity is unusually quiet on such an impactful day. However, in the last half hour, it’s picked up. At 10:41 AM EST, its volume is 50,121, 3x its 30-day average. Thirty minutes ago, the volume was less than the 30-day average.
It looks like things are going to get nasty today. So it might be time for aggressive investors to go options hunting. Here’s what I’d be looking at.
Yesterday’s Trading Was Dullsville
In Wednesday's trading, FHN had just two options that exhibited unusual options activity. Its total options volume was 54,704, nearly 3x its 30-day average of 18,502. The put/call ratio leaned heavily on the puts at 2.47.
There were slim pickings if unusual options activity is your bag.
Interestingly, one was a put option and the other a call. The put was a June 16 $10 with a bid of $0.70, while the call was also June 16 with a $20 strike. Given there are 43 days to expiration, I don’t see First Horizon’s shares doubling in the next six weeks. So, it’s a non-starter.
However, the $10 put looks interesting. Based on yesterday’s close of $15.05, if you sold a contract for the put, it had an annualized return of 4.0%. That’s a decent, if not spectacular, return. However, in hindsight, we know that if you had bought yesterday, there’s a good chance you would be forced to buy 100 shares at a net price of $9.30 in six weeks.
It wasn't a bad play if you really believe First Horizon’s CEO’s words from the termination press release.
“While today's announcement is unfortunate and unexpected, First Horizon will continue on its growth path operating from a position of strength and stability,” said First Horizon Chairman, President and Chief Executive Officer Bryan Jordan.
“Our strong capital position, disciplined credit quality, expense control measures, and well-diversified and stable funding mix have enabled our business to navigate challenging banking industry dynamics and remain focused on executing our client-centric growth plan.”
Today’s trading suggests investors disagree with Jordan’s optimistic view.
Is There a Better Trade to Make?
As I look at the unusual options activity for FHN, it has one option out of 368 whose volumes are at least 1.25x the open interest. It is the May 19 $9 put with 15 days to expiration and a bid of $1.20. Based on a $9.23 share price, that’s an annualized return of 316%. Worst case scenario, you’re left buying the shares at $7.80.
That seems like a perfect bet if you're an aggressive investor.
For a brief moment, I debated looking at regional bank ETFs. First Horizon is the sixth-largest SPDR S&P Regional Banking ETF (KRE) holding with a 2.84% weighting. While I'm not sure KRE is something most investors are interested in at this point, if you do end up owning shares, the downside is not nearly as high.
Yesterday, a big put trade happened, with the $62 put expiring on June 16 (44 DTE). The volume of the block trade was $11.4 million. As I look at today's trading, the $62 put has a bid of $26.20, good for an annualized rate of return of 626%.
That looks unbelievable, and of course, it is. Under this scenario, you will have the shares “put” to you in 43 days when it expires. Your net cost would be $36.80, slightly higher than where it’s currently trading.
Unless you think regional banks are no longer a problem (they are), this isn’t a smart play.
Let’s go back to First Horizon.
I found the May 19 $9 put intriguing. As I look at the $8 put expiring on the same day, that also looks interesting. It has a bid of $0.65. That’s a 6.9% yield. Annualized over a year, you’re looking at a 165% return. Worst case scenario: You’re forced to buy its shares for $7.35, 22% lower than where it’s currently trading.
Excluding the recent run-up due to the $25 TD offer, FHN last traded above $20 in January 2018. Before that, it was 2007. The other time it traded above $20 was between July 1997 and February 2000.
Otherwise, it’s a stock that historically has spent much time at or below $10.
First Horizon isn’t a stock I’d buy for the long haul, but that doesn’t mean you shouldn’t.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
