By Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) - Bearish options traders are ramping up bets on further declines in the beaten-down shares of First Republic Bank, though strategists say they could run into trouble cashing in their wagers if the bank goes into receivership.
First Republic's shares fell as much as 42% to a record low of $3.00 on Friday after CNBC reported the troubled bank was most likely headed to receivership. Options volume soared to 872,000 contracts by 3:30 p.m. (1930 GMT), with puts - used to bet on price declines - outnumbering calls on Friday by a ratio of more than 2.1 to 1.
As of Friday, with First Republic Bank shares at $3.67, around 785,000 put options on the bank's stock were "in-the-money," meaning that they stood to make a profit, following a 97% collapse in the bank’s share price since March 7.
Strategists, however, warned the stock could be halted if the bank goes into receivership, posing a problem for put options holders not unlike one encountered by bearish investors in Silicon Valley Bank, which collapsed last month.
"I would try to determine whether my broker will allow me to exercise put options if I am long them, in case the stock is halted," said Steve Sosnick, chief strategist at Interactive Brokers and a former options market maker.
Profitable put options are typically automatically exercised by selling underlying shares - either already owned by the investors or newly purchased - at a profit.
But brokers might restrict share sales when a stock is halted, keeping investors from reaping gains.
Some traders found this out the hard way when they ran into trouble cashing in bearish options bets on failed lenders SVB Financial Group and Signature Bank.
The banks' failure led to some traders initially being unable to cash in winning put options till brokerages made an exception to rules on banning short sales.
"If you do own puts and (FRC) does go belly-up, I think you have to call your broker and instruct them that you want to exercise the puts ... else they just expire worthless, and I think that might have caught some people unawares with Silicon Valley Bank," said Brent Kochuba, founder of options analytic service SpotGamma.
The Options Clearing Corp and brokerages Charles Schwab (NYSE:SCHW), Robinhood (NASDAQ:HOOD), Interactive Brokers and Fidelity did not immediately respond to a request for comment.