Deutsche Bank Derivatives – How to Trade

  • Posted October 3, 2016

It’s obvious that Deutsche Bank has been in a bearish trend. Technically and fundamentally speaking, there is not much reason to believe this trend will end anytime soon. It could even be, that traders will continue to beat up on the price of DB stock, until politicians are ‘forced’ to intervene. Whether that is in the form of a bail-in, a bail-out, or some other Ivy League economic theory….the systemic risk posed, especially from Deutsche Bank Derivatives, can not be ignored.

As of this writing, Deutsche Bank stock shot up over 15% on the previous trading day. It now sits at $13.23. While some see this as a ‘disaster averted’ type of move, it could just be a dead cat bounce. The bear trend is still intact, Deutsche Bank derivatives nor any other issue concerning the bank have been resolved. We view this 15% move higher for Deutsche Bank to be a better chance for profiting off of a medium-long term short trade.

As we see how the saga unfolds, let’s give a few of the bank’s problems, and will cover a few trade ideas for Deutsche Bank and Citigroup.

Deutsche Bank Derivatives chart


It can happen again


You have heard of the “too big to fail” institutions, but even so, Bear Stearns and Lehman Brothers did not make it out alive from the last financial scare. Central banks can try to control all they want, they only postpone and worsen the eventual comeuppance. There is still no guarantee that any one institution will make it.

Merely looking at the stock price, DB can fall further than you might expect. $0 is not out of the question. In May 2007, DB stock was nearly $160 a share. By January 2009, only 20 months later, DB stock was bottomed around $21 a share.

Citigroup faced a similar path. In May 2007, Citigroup stock was nearly $555 a share. By March 2009, it bottomed at under $10 a share!

Today, many of the same mistakes from the 2007-2008 crisis are being repeated. Notably, the massive amounts of credit derivatives being held. Actually, as Deutsche Bank is trying to dump some of their credit derivatives, Citigroup is taking on the default swaps. It’s as if they are a hot potato, and if any one bank doesn’t hold them for too long, nobody gets burned. At least that’s the way it looks to me, a simple laymen. I’m sure the Ivy League economists have it all figured out, ha.

(according to OCC’s latest report, Citi holds $56 trillion in derivatives)


What exactly is happening again?

Deutsche Bank Derivatives debt us

A derivative is a contract involving two parties that agree to make set payments to each other. However, if one is unable or unwilling to follow through, the other is out the money in a big way. That’s what happened in 2008 with AIG. That’s why the U.S. government bailed out AIG, because their losses would have led to other counterparty losses, and the domino effect could have wiped out the financial system.

THAT is what is happening again.

It’s a complex, globally interconnected, not easily defined, not easily priced, Quadrillion dollar atomic time bomb! Citigroup and Deutsche Bank are at the epicenter of the bomb.


Deutsche Bank Derivatives and More

Deutsche Bank Derivatives credit

Here are just a few things Deutsche Bank has faced over the last few years.

  • ordered to pay for rigging benchmark rates
  • ordered to pay for filing inaccurate derivatives statements
  • litigation charges
  • unprofitable (lost $7.6 billion in 2015)
  • CEO announces 2016 will be unprofitable too
  • being sued by United States Department of Justice
  • charged in Italy for market manipulation
  • stock steadily falling
  • labelled as ‘world’s riskiest financial institution’ by the IMF
  • finally, the massive position in Deutsche Bank derivatives

Deutsche Bank Derivatives gdpConsidering Deutsche Bank derivatives and more, things appear dire for DB. And this in a face of an already shaky global environment. Debt is still rising, and the debt-to-GDP ratio is still growing. Imagine this, the amount of derivatives outstanding dwarfs the actual Gross Domestic Product. In fact, Deutsche Bank’s derivatives exposure is greater than the entire European GDP. And this from a bank which has already has regulatory issues, and poor management from the top. What could go wrong, right?

Credit default swaps are still illiquid, they are not the easiest to unload. As there is currently no panic, the majority is not focused on this problem. But in a crisis, the low volumes and huge spreads overwhelm the party, and eventually the system.

While Deutsche Bank seems to be in the worse shape, Citigroup, J.P.Morgan, Bank of America, and Goldman Sachs all still play in the derivatives casino.

The real problems and fissures in facade have been masked by the central bank infused bull market. This means the the actual devastation can not be known until it actually begins.


How to Trade


There are a few options we can use to profit off of Deutsche Bank derivatives and what seems to be the certainty of a blow up. Only our timing is not certain. In light of this, we can buy put options on Deutsche Bank and Citigroup.

DB January 20, 2017 $10 puts (DB170120P00010000) – currently priced at $0.85 (mildly risky, for continued orderly decline)

DB January 20, 2017 $5 puts (DB170120P00005000) – currently priced at $0.30 (risky, crash insurance)

DB January 19, 2018 $5 puts (DB180119P00005000) – currently priced at $0.60 (a bit risky, crash insurance with more time)

C Janurary 19, 2018 $20 puts (C180119P00020000) – currently priced at $0.59 (a bit risky, crash insurance with more time)


For your Deutsche Bank derivatives trades, keep in mind, your options expiring in 2017 will have a greater reward potential, but they will be more risky as the time decay will weigh on them. Also, we aren’t necessarily going to hold them through expiration. As we don’t know exactly when the bomb will trigger. All said, we see DB stock in a healthy bear market even without a ‘trigger’, so these are still worth trading. Be prepared for the 15% bullish type of daily moves like we saw Sept 30, but do mind your stops!

I personally hold the DB January 2017 $10 puts, and the C January 2018 $20 puts.

God Bless.

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