The Pros and Cons of This Unusually Active NYCB Call Option

In February, I discussed the unusual options activity of New York City Bancorp (NYCB). At the time, it had released Q4 2023 results just days earlier. They weren’t good. It reported an unexpected adjusted net loss. Worse, investors were worried about the bank’s multi-family residential loan portfolio.

“Typically, multi-family residential real estate is a safe bet because people have to live somewhere. However, as of September 30, 2023, approximately 52% of its multi-family loans were in New York City, where rent-stabilization laws are in place,” I wrote on Feb. 8.

So, between not being able to raise rents in NYC by more than 3% for one-year leases, and higher interest rates, property valuations were plummeting, forcing some owners to sell at steep losses. 

Due to all this bad news, its shares fell 38% in Jan. 31 trading. Accounting for its 1-for-3 reverse split on July 12, NYCB stock closed Jan. 30 trading at $31.14, and then closed the next day at $19.41. By March 6, its shares had bottomed at $5.10. As I write this before the Thursday open, its shares have doubled from the 52-week low. 

I’ll get into why in a bit. 

On Thursdays, I write about one or more unusually active options that have drawn attention. NYCB has done just that. See below.

 Admittedly, I have not followed the bank’s situation closely since former U.S. Treasury Secretary Steve Mnuchin led an investment group that invested over $1 billion into the bank in March to help right the ship.

However, when I saw the call was in the top 100 unusually active options in Wednesday trading, I just had to write about it. 

Here are the pros and cons. 

The Pros of Buying This Call

First off, the Vol/OI ratio of 11.44 put the $3 call in 65th spot in yesterday’s trading with volume of 1,899. That represents over 10% of its 30-day average volume of 16,862. The Put/Call Volume ratio for NYCB options yesterday was 0.23, a bullish sign. 

Despite all that has happened, the 17 analysts covering NYCB rate it Hold (3.12 out of 5), with a target price of $12.48, 9% higher than where it’s currently trading. More importantly, there are two Strong Buys to only one Strong Sell. 

The bank reports Q2 2024 results July 25 before markets open. It’s expected to lose 40 cents in the quarter, down from a profit of $1.41 a share a year ago. It’s expected to lose $1.53 in 2024, about 3x its loss in 2023. However, on the plus side, it’s expected to earn $0.85 in 2025, and $1.36 in 2026, according to S&P Global Market Intelligence. 

Based on yesterday’s closing price, it’s trading at 8.4x the 2026 estimate. 

So, the ask price of the $3 call is $1, or 33%, which is a high percentage, but the total financial outlay of $400 on exercise isn’t massive, so it’s manageable. 

The catch? It’s a “restricted” option because of the reverse split, so the contract for the call isn’t for the right to buy 100 shares, it’s for one-third of that, or 33.33, which means the post-reverse split strike price would $9, and the ask price is $3, not $1.

It’s the same 33% down payment. 

The Cons of Buying This Call

I maintain that despite writing about options for over two years, I’m still very much a newbie. That’s why I was attracted to this particular call. It’s an opportunity to do some analytical thinking. 

At first, you see a $3 strike and total outlay of $4 were you to exercise your right to buy 100 shares, and think, “I’ve found the motherlode of profitable bets.” With just 64 days to expiration, the newbie thinks they’re sitting on a profit of $7.44 per contract [based on closing price of $11.44], or a 186% return on your $4 outlay. Annualized that’s 1,061%. 

And then the pin goes into the balloon and your bet explodes. 

The actual price paid were you to exercise your right to buy for this so-called $3 call option would be $12 [$9 strike plus $3 ask], 56 cents (4.9%) above its Wednesday closing price. 

With 64 days till expiration, if you’re bullish about the next 10 weeks for NYCB stock -- it’s up nearly 30% in the past month -- that’s not a huge bet with $300 your maximum loss. 

However, the Motley Fool made some good observations in May about New York Community Bancorp’s situation. 

“If you buy New York Community Bancorp today, you are probably going to be sitting on dead money until the bank starts to show meaningful progress on its stated goals. And the stock probably won't find wider appeal among investors until it starts to raise its dividend again at some point in the future,” Motley Fool wrote on May 18. 

Basically, it argued that NYCB isn’t going out of business, but it’s probably not moving much higher. It’s gained about 12% since the Motley Fool article.

The moral of the story? Playing the options market isn’t a game. Govern yourself accordingly.