My Favorite Way to Trade the Banks Today
Today, there are several financial stocks that have weekly options available to trade on them. There are also several financial Exchange-Traded Funds that offer weekly options, and the one I like right now is the Direxion Daily Financial Bull 3X Shares ETF (NYSE:FAS).
This bullish ETF is made up of banks and various financial institution stocks. Not that the banks and financials can’t go lower from here, however. But there’s compelling premium in there that we can be collecting from week to week, and I don’t think it goes much lower from here.
When I look at FAS, I see opportunity … particularly because of those weekly options. The main reason there’s nice premium to collect on FAS is because it’s a leveraged ETF. This one has a three times (3X) multiplier effect.
When you structure a weekly options trade, you can get positioned to profit AND protect your downside. (Let’s define downside as the worst-case scenario … which is something going all the way down to zero!)
Again, I don’t know if the Barron’s article is off on its timing; it may be. Bank and financial institution stocks could languish around for many more months. But as long as they remain in the news, they will be volatile. And my view is that they’ll have some ground to cover, and they’re close to the bottom.
For options traders, volatility translates into higher option premiums, which is great when you’re entering a trade where you’re set to pocket that premium right away. And that’s exactly how today’s trade opportunity is structured.
And when you combine weekly premiums, a leveraged ETF, a volatile/hated sector, and downside protection … you get a trade that I like!
Also, it’s important to keep in mind that with an ETF, you don’t have any earnings announcement events to deal with, as the ETF is comprised of many stocks of a particular sector.
Making the Trade: FAS Weekly Options
With all that said, here’s a trade that looks good to enter right now:
With FAS trading around $12.80-ish, I’m selling this week’s FAS Oct 12 Puts (which are out-of-the-money puts, meaning the strike price is below the market price of the stock) and buying the FAS Nov 10 Puts (which are also out-of-the-money).
Right now you can collect about 30 cents on the sale of those Oct 12 Puts. Now, when you sell these puts, you’ll need $1,280 in capital per contract (to represent 100 shares in one options contract, or $12.80 x 100) to support the position in your account.
This doesn’t mean you’re spending that money — it’s simply being reserved in case the stock would be “put” to you between now and expiration. But one terrific benefit of trading weekly options is that you don’t have a lot of time while you’re in the trade — which means there isn’t a lot of time for the underlying stock or ETF to make a significant move. In other words, with weekly options, you move the odds in your favor by only being in the trade for just a few days at a time.
On a side note, I have many times before (and will consider it with this trade) had shares “put” to me when doing a trade like this.
If this is the case, I end up taking ownership of FAS shares, but at a discount.
That’s fine with me, because then I can turn right around and sell weekly, plump calls against those shares and collect income that way!
Now, about those long FAS Nov 10 Puts…
Buying these puts to hold long while you’re in the short October put position is a great protective measure. You’ll spend about 65 cents for this protection, but by selling options against them week after week, you should make back that investment pretty quickly PLUS have peace of mind for the duration of your trade.
I’m looking for those October options to expire without any value on Friday. (When the options expire, or you close out your position instead, the capital that was reserved in case you had to buy the shares is immediately freed up and ready to use for your next trade.) And next week, I’ll sell another round of weekly puts, and put that premium in my pocket, too.
Week after week after week in the world, the banks and the tents battle it out in front of the cameras. In the end, there is value in the banks — and the value proposition will win out in the end. This kind of trade makes money if things stay neutral or turn bullish. And it even makes money if things stay slightly down for the banks in general.
This is powerful stuff. And when you get the hang of it, maybe you can set aside some of your gains and donate them toward some shampoo and deodorant for all those folks stinking up lower Manhattan!
I hope this finds you well.
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Learn about my Weekly Windfall Secrets here.