Banking on near-term downside in Zions (NASDAQ: ZION)

Zions Bancorp (NASDAQ: ZION) released comments from the Citi Financial Conference today that it plans to repay TARP funds after its credit conditions and earnings outlook improve. The news buoyed the stock more than 7% during midday trading. Options action from at least one investor, however, suggests a bet on a pullback in the next 38 days.

ZION shares are currently trading up $1.22 to $20.48. The stock recently breached $20 in February, but it looks like at least one investor thinks this rally could end sooner rather than later.

Around 11 a.m. EST, an investor sold 22,000 out-of-the-money April 17 puts for the bid price of 30 cents per contract and simultaneously bought roughly 10,000 out-of-the-money April 19 puts for 78 cents per contract to pay a net debit of roughly 12 cents per ratio spread. The 17-strike puts have dropped 16 cents, and the 19-strike puts have declined 36 cents so far on the day. Current open interest of the April 17 puts and April 19 puts is 26,000 contracts and 4,700 contracts, respectively.

Though this trade looks like a lot of put volume at face value, investors bought some of the puts and sold others, so that is why we say that this is moderately bearish instead of exceedingly bearish. A look at the OptionsHouse Profit & Loss Calculator tool shows the risk/reward dynamics of this ratio put spread. Investors could make a maximum profit of $1,880,000 if ZION shares close right at $17 at April options expiration. Maximum loss on this spread is $120,000 if ZION shares close higher than $19. Investors could also lose money if the stock drops lower than $13.18, which again, is why we say it is just moderately bearish. Open a free virtual trading account to visualize this trade and other option plays.

For more on ZION:

Buying puts in Zions (NASDAQ: ZION)

Zions Bancorp (NASDAQ: ZION) bear put spread