An Options Pricing Inefficiency Points to a Screaming 28% Yield in Truist Financial (TFC)

If you’re looking for an edge in the market, you need to find the gaps that are not being covered. In baseball, it’s about hitting ‘em where they ain’t. You can deploy a similar strategy in the options market, especially with the groundbreaking tools available to Barchart Premier members. Still need more convincing? Let’s take a look at Truist Financial (TFC).

Known as the sixth-largest commercial bank in the U.S., Truist sits between the major national banks and the localized regional banks. Providing a wide range of financial products and services, the enterprise is one of the most recognizable brands in the business. However, anxieties ran hot ahead of the third-quarter earnings season due to economic concerns and a contentious election cycle, among other headwinds.

Nevertheless, a lot of these fears were put to rest thanks to JPMorgan Chase (JPM). The banking giant delivered an earnings and revenue beat for Q3 and revealed positive guidance for the current quarter. As expected, that led to a notable decline in implied volatility (IV) for JPM stock — essentially, Wall Street no longer anticipated big movements in the share price.

However, the market doesn’t quite feel the same about TFC stock. After Friday’s close, IV landed at 33.13%, noticeably above its historical volatility (HV) of 19.23%. The reason? Truist still must prove itself, with the financial firm set to disclose its results on Oct. 17.

Nevertheless, it’s quite possible that whatever positives that benefited JPMorgan would also trickle down to Truist. While they’re not obviously in the exact same category, they’re similar entities. If the commercial bank manages to hold the ship steady, that could send TFC stock moderately higher. Such a possibility incentivizes consideration of an options credit spread.

Read the Options Sentiment Carefully for TFC Stock

It must be noted that what makes TFC stock a counterintuitive idea for many retail traders is the seemingly bearish sentiment against Truist. That’s another reason to consider Barchart Premier: before you make a major decision with your money, you want to make sure that you’re getting the full picture.

At first glance, the unusual stock options volume screener doesn’t appear auspicious for TFC stock. Sure, on Friday, volume of 44,524 contracts — against an open interest reading of 226,296 contracts — represented an increase of 523.15% against the trailing one-month average metric. However, call volume only landed at 18,941 contracts, while put volume hit 25,583.

That doesn’t sound appealing because the put/call volume ratio of 1.35 indicates more traders engaging put options than calls. However, options flow data — which filters exclusively for big block transactions likely placed by institutional or professional investors — reveals that net trade sentiment stands at almost $1.11 million, overwhelmingly on the bullish side of the spectrum.

In fact, bearish sentiment trades saw total volume amount to only $-100,300. In total, bullish sentiment trades hit nearly $1.21 million. The reason for the seemingly counterintuitive put/call ratio is that the second-largest transaction on Friday involved 15,000 put options. Likely, a major investor sold those puts to collect income after Truist (hopefully) reveals positive Q3 results.

However, you wouldn’t necessarily know this information just by looking at unusual options data provided by other financial publication firms. That’s why I stressed the importance of Barchart Premier, which gives you the data and the context.

All told, the smart money aims to collect income from TFC stock and we can accomplish the same with a credit spread, specifically a bull put spread. This trade involves selling a put option to generate income and buying a put option at a lower strike price to cap off the risk of assignment.

It’s a powerful tool, one that should be a part of any serious trader’s strategy arsenal.

A Clear Winner Emerges

At this point, I can direct you to Barchart’s long list of mathematically viable bull put spreads for TFC stock and call it a day. However, I’m going to deviate from the standard dissemination of opinions and instead let you in on a little secret:

The options market isn’t always efficient.

It’s an important point to ponder. You see, if the derivatives arena were truly efficient and rational, for every measure of yield increased, the probability of success for that trade should diminish. In other words, the higher the risk, the higher the reward — that’s simple stuff.

However, certain trades are mathematically inefficient. And in the case of the 42.50/41.50 bull put spread expiring Oct. 18 — that is, sell the $42.50 put and buy the $41.50 put — the yield of 28.21% is favorably incongruous with the profitability potential of 67.4%.

Based on mathematical expectations, a put spread with a profitability potential of 67% should have a yield of around 23%. Thus, you’re getting around five percentage points of “free” yield for the same amount of risk.

If you love trading on math as opposed to emotions, you know that’s a smoking deal. And really, this kind of information is what you can expect to extract daily from Barchart Premier.

More Stock Market News from Barchart

• 3 Blue-Chip Dividend Stocks to Buy in Q4
• Citigroup (C) Options Pricing Inefficiency Offers a Chance for 23% Yield This Week
• Nvidia Stock 2025 Forecast: Can the $3T AI Chip Giant Get Even Bigger?
• Is This Chinese EV Startup a Good Growth Stock to Buy Now?

On the date of publication, Josh Enomoto 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.