I’ve been getting asked a lot of questions about First Republic Bank (NYSE: FRC) lately. That’s understandable since its share price fell through the floor after the collapse of Silicon Valley Bank (SVB) in March.

In early February, FRC was trading above $147 after rising 21% since the start of the year. Last week, it dropped below $5 on fears that the bank may go into receivership.

Like SVB, First Republic Bank has an unusually high number of uninsured deposits. It is headquartered in San Francisco and does business with many of nearby Silicon Valley’s venture capitalists and the companies in which they invest.

When a run on deposits forced SBV to shut down, First Republic Bank’s depositors followed suit. Since then, the bank has scrambled to shore up its balance sheet.

Unlike SVB, the federal government has not yet stepped in to broker a deal that would effectively insure all of First Republic Bank’s depositors. They are leaving in droves, forcing the bank to sell more assets at a loss.

Without some sort of government bailout, it appears inevitable that First Republic Bank will soon fail. At that point, its common stock would become virtually worthless. Hence, the 95% decline in its share price over the past three months.

The question I’m being asked is this; Is now a good time to buy shares of FRC on the hope that the bank will avoid receivership and eventually recover? If it can manage to pull off that trick, its share price could double (or more) in a matter of days.

One Way or Another

After being harshly criticized for bailing out SVB’s depositors, the federal government is taking a more deliberate approach to First Republic Bank. The bank has become a “hot potato” that nobody wants to get stuck with.

But sooner or later, something has to give. Rumors have surfaced that the bank is attempting to obtain financing from several big banks. However, they are waiting to see if the federal government will step in to absorb the losses that the big banks might otherwise incur.

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This game of chicken can’t go on much longer. Last month, First Republic Bank lost more than $100 billion in deposits. Pretty soon, it won’t have enough assets left to sell to cover the remaining deposits.

The options market thinks something big is going to happen soon. Last week while FRC was trading at $6.30, the call option the expires on June 2 at the $6 strike price was selling for $2.50 (a call option increases in value when the price of the underlying security goes up).

At the same time, the put option that expires on the same day and at the same strike price was going for the same price (a put option increases in value when the price of the underlying security goes down). In either case, FRC would have to move at least 40% one way or the other within the next four weeks for those trades to be profitable.

What that means is that the so-called “smart money” on Wall Street has no idea which way FRC is going to turn next. But once we know if the bank will be able to engineer a turnaround, its share price should move strongly in one direction or the other.

Putting the Squeeze On

One thing that could cause FRC to surge is a short squeeze. Last week, short interest in the stock was near 30%. That means there is a lot of money riding on the bank going into receivership and its share price going to zero.

But if the bank can avoid that fate, those short sellers will want to close out their positions. And if they all try to buy the stock back at the same time to cover their short sales, that could drive FRC considerably higher.

In that regard, FRC may appeal to the same “meme stock” traders that drove shares of GameStop (NYSE: GME) from below $5 to above $120 in January 2021. They replicated that strategy with several other stocks including AMC Entertainment (NYSE: AMC) and Bed Bath & Beyond (NSDQ: BBBY).

Coincidentally, Bed Bath & Beyond filed for bankruptcy two weeks ago. Last week, its shares were going for 12 cents after it was delisted from the New York Stock Exchange. A similar fate could await FRC even if meme stock traders temporarily drive its share price higher.

The lesson is this: If you are going to speculate on First Republic Bank, then do it soon and get out fast. Ultimately, the bank is most likely destined to fail. But in the meantime, there may be some money to be made if it can hang in there long enough to induce a short squeeze.

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