Piling Into Bearish UBS Options Proved to Be Well-Timed Bet

  • Put volume surged to its highest level since May versus calls
  • Tougher capital requirements may mean lower investor returns

Traders who snapped up bearish options on UBS Group AG Monday, pushing volume on the contracts to the highest level since May relative to bullish ones, are sitting on profits today after shares of the Swiss bank dropped on concern about new capital requirements.

UBS shares fell as much as 3.5 percent after people briefed on the situation said Switzerland is asking its biggest lenders to increase their leverage ratios. That’s good news for investors who piled into options that amounted to bets the stock would decline. A block of contracts placed on Monday speculating on an 11 percent slump in UBS by next June jumped 15 percent in value, while another put surged 500 percent.

“It was a well-timed bet,” said Ion-Marc Valahu, co-founder and fund manager at Clairinvest in Geneva. “So far that trade is making money.”

Ratio of UBS puts versus calls traded

Swiss banks are sliding today as the prospect of tougher capital requirements means they’ll have to set more money aside, potentially limiting shareholder returns. People familiar with the matter said the nation’s finance ministry will require the biggest lenders to keep capital equal to about 5 percent of total assets, and UBS, which rallied 11 percent this year through yesterday, would be more than 1 percentage point short of the new target. It had a Basel III leverage ratio of 3.6 percent at the end of the second quarter.

Almost 6,800 UBS puts changed hands yesterday, 10 times more than calls. A block of 4,000 June 17-franc puts traded for 1.05 francs ($1.09) each. They’re now worth 1.20 francs apiece.

Bets that UBS shares will slide to 17.50 francs by the end of the week -- an 8 percent decline from yesterday’s close -- were those that jumped the most in value in Switzerland today, rising to 6 centimes from 1 centime. October 18-franc puts were the fifth-biggest gainers, surging 400 percent.

UBS slipped 1.1 percent on Tuesday, while Credit Suisse Group AG trimmed its losses to 0.7 percent from as much as 3.9 percent.

A UBS spokesman said the company doesn’t comment on market moves.

Before it's here, it's on the Bloomberg Terminal.