Late Monday, The Bank of New York Mellon Corporation (NYSE: BK) unveiled its plan to sell $1.2 billion worth of stock in order to repay its TARP loan to the U.S. Treasury Department. The company priced 42 million shares at $28.75 a piece, a discount of 3% to the stock's close on Monday.
Even though BK passed the government's stress test with no trouble, the bank is nonetheless eager to raise funds and pay off its debt to the government. Other financial firms selling stock to repay TARP loans include Capital One Financial (NYSE: COF) and U.S. Bancorp (NYSE: USB).
However, investors seem none too pleased with BK's dilutive stock offering. The security shed 2.5% within the first 10 minutes of today's trading, extending BK's retreat from double-top resistance at the $33 level. The shares first shied away from this region in mid-April, and pulled back from the $33 neighborhood again last week.
Today's news has prompted a flurry of activity on the stock's May 26 put. This out-of-the-money option saw 1,005 contracts cross the tape right out of the gate, on existing open interest of 5,344 contracts. The majority of the trades here are taking place near the bid price of 10 cents, suggesting that these puts are being sold.
The put seller in this scenario might be trying to take advantage of newfound support from BK's 10-week and 20-week moving averages, the latter of which recently rose through the $26 level. By writing puts, the trader is indicating that he or she expects the stock to hold steady above the 26 strike throughout the end of the week, when May-dated options expire.
Currently, the May 26 put is a respectable candidate for a put-sell strategy. Implied volatility on the option has climbed to nearly 92% from Friday's close at 80%, propelling the option's price higher.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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