Friday at last.
If you live in the eastern half of the U.S., you’re likely very aware of the poor air quality in many cities due to the wildfires in Northern Ontario. Please think good thoughts for all the evacuees and the fire crews fighting approximately 106 wildfires in the region. It’s as serious as things get in life.
Can’t Get Enough Options?: Join the list for Barchart’s daily unusual options report, delivered free.
The S&P 500 futures are down and the VIX is up as I write this before the markets open. The Nasdaq Composite lost 1.47% yesterday. The tech-heavy index is down 1.21% through Thursday. Investors continue to worry about chip stocks. Today’s action looks gloomy.
One non-tech stock that had a good day yesterday was First Horizon (FHN), the Tennessee regional bank. It was up 1.84% on the day after announcing better-than-expected Q2 2026 earnings.
As a result, First Horizon’s share and options volumes were above average yesterday. The 11.3 million shares traded were more than double its 30-day average, while the options volume of 200,923 was nearly 17 times the 30-day average, and the fifth-highest single-day number in the past two years.
Interestingly, much of First Horizon’s options volume was for one unusually active Nov. 20 call option. I’ll break down three things investors can take from yesterday’s action.
Have an excellent weekend. Please stay safe.
The FHN Call Option in Question
First Horizon’s Nov. 20 $27 call, the bank's only unusually active option yesterday, was the second-highest on the day with a Vol/OI (volume to open interest) ratio of 223.80. It was one of only two options with Vol/OI ratios above 100.
The unusually active call accounted for nearly 50% of First Horizon’s options volume yesterday. More importantly, that one trade, along with four other trades of 10 or more contracts, accounted for 99.7% of First Horizon’s options volume. A single institution clearly drove this.
Based on yesterday's options flow, there were two 100,000-contract trades, and, not coincidentally, they occurred at the same time. The two trades point to a Short Call Diagonal Spread.
Why a Short Call Diagonal Spread?
When you read the word “short” in investing discussions, one immediately gets a negative connotation. For example, U.S. News published an article yesterday titled Short Sellers Notch $8.7 Billion Profit as SpaceX Shares Dip to IPO Price, discussing the rise and fall of Elon Musk’s latest moneymaking scheme.
In options, however, that isn't necessarily so. You might be short an OTM (out of the money) cash-secured put that you trade for premium income while giving yourself the opportunity to buy shares of a company you like at a later date and at a lower price.
You can also use a short call diagonal spread options strategy.
While this defined-risk (limited profit and loss) strategy is generally considered bearish, you can be bullish on First Horizon in the long term and still utilize the strategy, which involves selling a nearer-term expiration call option and buying a longer-term expiration call option at a higher strike price.
So, using the example of the two 100,000-call contracts, here’s how someone positive about the bank’s future might use the short call diagonal spread to profit. I’ll use four share prices at the Nov. 20 and Jan. 15/2027 expirations to illustrate.
1) Sell 1 Jan. 15/2027 $31 short call for $0.36 premium income.
2) Buy 1 Nov. 20 $27 long call that costs $1.04 in premium. That creates a net debit of $0.68.
3) The maximum loss is $0.68. The maximum profit depends on the value of the long call at expiration on Nov. 20 or when you sell to close.
Assumption #1: FHN share price is $23 at Nov. 20 expiration and Jan. 15/2027 expiration.
1) Both options expire worthless.
2) The net loss is $0.68, or the net debit.
Assumption #2: FHN share price is $29 at Nov. 20 expiration and Jan. 15/2027 expiration.
1) The short $31 call expires worthless. Its intrinsic value is $0.
2) The long $27 call’s intrinsic value at expiration is $2 [$29 share price - $27 strike price].
3) The net profit is $1.32 [$2 - $0.68].
Assumption #3: FHN share price is $35 at Nov. 20 expiration and Jan. 15/2027 expiration.
1) The short $31 call has an intrinsic value of $4 [$35 share price - $31 strike price].
2) The long $27 call’s intrinsic value at expiration is $8 [$35 share price - $27 strike price].
3) The net intrinsic value is $4 [$8 - $4].
4) The net profit is $3.32 [$4 - $0.68].
Assumption #4: FHN share price is $40 at Nov. 20 expiration and Jan. 15/2027 expiration.
1) The short $31 call has an intrinsic value of $9 [$40 share price - $31 strike price].
2) The long $27 call’s intrinsic value at expiration is $13 [$40 share price - $27 strike price].
3) The net intrinsic value is $4 [$13 - $9].
4) The net profit is $3.32 [$4 - $0.68].
The investor/trader who did this short call diagonal spread utilized this options strategy to lower the cost of the $27 long call. So, instead of spending $10.4 million for the 127-day DTE (days to expiration), it paid $6.8 million, 35% less. The downside: It capped its maximum profit at $33.2 million [$3.32 net profit * 100 shares * 100,000 contracts].
The Bottom Line on FHN Stock
I picked First Horizon for today’s unusual options activity commentary not because of its Vol/OI ratio. However, it was very high, usually a high-conviction signal, but rather because of its past failed M&A dance with Toronto-Dominion Bank (TD), which I coincidentally wrote about on Wednesday, in a discussion about Canada’s Big Five banks all hitting new 52-week highs.
I actually wrote about First Horizon’s unusual options activity on May 4, 2023, the day it and TD agreed to call off their $13.4 billion merger. FHN stock got crushed on the news, falling to under $10, well below the $25 per share TD was willing to pay.
Three years later, it’s managed to claw its way back to $25.
“Excluding the recent run-up due to the $25 TD offer, FHN last traded above $20 in January 2018. Before that, it was 2007. The other time it traded above $20 was between July 1997 and February 2000. Otherwise, it’s a stock that historically has spent much time at or below $10,” I wrote in May 2023.
“First Horizon isn’t a stock I’d buy for the long haul, but that doesn’t mean you shouldn’t.”
Would I buy FHN at $25 and change today? Probably not.
Analysts are lukewarm about it. Of the 21 that cover it, 9 rate it a Buy (3.76 out of 5), with a $27.67 target price, above its current share price.
TD announced its First Horizon acquisition in February 2022. By midyear, its forward P/E ratio averaged 14.3x. That multiple today is 11.8x.
So you could argue that the multiple is relatively low compared to peak M&A. You could also argue, however, that on several occasions over the past decade, the forward P/E multiple has been as low as 5.3x in March 2020.
Up nearly 200% since the cancellation of the deal with TD, momentum is on First Horizon’s side. So, I can see the rationale behind the trader/investor’s short call diagonal spread options strategy.
The last time it hit $30 was in 2007. If it does get to $30 in 2026, I’d be highly surprised if it finished 2027 above $40. As I said in 2023, I wouldn’t buy it, but that doesn’t mean you shouldn’t.
On the date of publication, Will Ashworth 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.
More news from Barchart
Wall Street Just Punished Netflix’s Guidance, But the Real Story Could Send the Stock Much Higher After This Stock Popped on Earnings, Options Traders Are Betting $6.8 Million on a Short Call Diagonal Spread Why Circle Stock Is the Most Divisive Name in Fintech Right Now Why Piper Sandler Likes AST SpaceMobile (ASTS) Stock Over Other Space Stocks