Fifth Third Bancorp (FITB) is a financial services company with over $115 billion in assets and 1,316 banking centers throughout the Midwest United States. The company’s stock is currently trading around $20.05 in a 52 week range of $14.05-$20.21. The stock has had a great year adding nearly 32% to share prices year to date. On a chart the stock is trading well above the Ichimoku Cloud and is just off of its 52 week highs. The stock does appear to be consolidating however and the future cloud is in a region that appears to relatively neutral. Action in the options market suggests that traders believe this sideways action will continue in FITB as we have seen large sellers of straddles come in the market. Early this morning a trader sold 6,000 FITB Dec 20 straddles for $0.67. This block represents volume that is 6.4 times the average daily option volume in FITB. Short straddles are incredibly risky so we know that this trader has a relatively high level of conviction. We believe that the price action and order flow in FITB confirms the stock will be in a period of consolidation in the short term. We want to take advantage of this but do not have the risk tolerance for short straddles. Instead will use a strategy that will have us short premium and implied volatility but won’t carry the blowout risk of a short straddle.
Trade: Selling the FITB Dec 20 Straddle and buying the Dec 19-21 Strangle for $0.55 net credit.
Risk: $45 per 1 lot
Reward: $55 per 1 lot
Breakeven: $19.45 and $20.55
This trade sets up for a great risk vs. reward ration and takes the same view as the block trader but with a much lower risk level.
