by Preston James | October 19, 2011 8:15 am
The cover of this past weekend’s Barron’s was all about how the biggest and best banks are trading at or below their tangible book value. The cover-story article claims that most of the fear and worst-case scenarios have already been baked in to the nation’s most-prestigious banking stocks.
Barron’s also cited these same companies’ ironclad balance sheets and dividends. Basically, there’s value sitting there in banking and other important financial stocks — and it hasn’t been this way in decades.
Sounds good if you’re looking for a great place to invest some money, right?
Yet, the story today is how hated all things “financial” are. The TV camera loves showing a mob, and that’s exactly what we’re being served — a steady spotlight showcasing unshowered college kids camping out with their signs and a grudge. And now they’re roaming all over Manhattan, chanting at one CEO’s residence after another.
Another Big, Bad Industry Makes Good Money for Investors
This spotlight reminds me of 10 years ago, when the target was the tobacco industry. Remember the lawsuits and the incessant TV coverage — day after day, week after week? It seemed everyone and their dog was in on the class-action lawsuits. Not to mention all the cities, states and the big, bad federal government with its armies of lawyers smelling the blood!
Know what? Through it all, Phillip Morris (NYSE:PM) never once missed a dividend payment. In fact, the company kept increasing the payouts throughout this entire period of absolute hell!
Now I don’t care much about the dividend side of things — I’m pointing that out to explain just how well-run some of the country’s top companies are, regardless of what the public’s perception of them is.
The takeaway here is that the tobacco companies emerged from that tangled, sue-happy time just fine. In fact, investors were handsomely rewarded, simply by doing nothing during that entire time!
Hate the Companies, But Love the Potential Profits (for You)
Whatever Big Tobacco’s opponents thought about the companies and their products, the fact is, investments in them paid off. Dividends were re-invested, which bought up more shares of depressed stock prices … stock buybacks picked up … spin-offs took place, enhancing shareholder value … and the stock prices themselves surged for many years after this spotlight moved away.
Fast-forward to today. Now it’s the banking sector’s turn to be in the crosshairs. It’s fun, easy and politically correct to hate on banks and anything Wall Street or financial in nature. It’s the perfect storm.
But underneath, publicly traded financial companies have been forced to get fit, lean and mean. That’s what staring survival in the face will do. Many of them have paid back their TARP loans, and are otherwise sitting pretty. And there they sit all muscled up, while being kicked around, joked about and spotlighted in the media as bad.
It’s one thing for the Occupy Wall Street faction to protest against and even boycott the banks. But for investors to turn their backs on the banks means giving up some nice returns of their own. Did you know Goldman Sachs’ (NYSE:GS) trading accounts are estimated at $800 billion in size? That’s just one company!
So here’s the most-hated sector, banking and investment firms. They’re front-and-center in the media, which makes sure to highlight these mobs every single night on the evening news. And it’s stupid.
This kind of one-way harassment will lead to this sector breaking out — you watch — and it’ll happen subtly. Just like with the tobacco companies of a decade ago.
Banks Will Do Well, With or Without Popular Approval
Eventually the protestors will go home, and the outrage over the banks will die down. But there will always be something else for people to get upset about. Maybe the spotlight nudges over to where the “tents” will camp out next … maybe on the front lawns of Big Oil CEOs, or maybe the coal guys?
One thing that won’t be reported on, however, is just how politically connected they are and how many powerful people are in place throughout the banking sector. History is simply repeating itself — the political establishment couldn’t have afforded for there to be no tobacco industry. This free-flow of revenue funds all kinds of pet projects for politicians to look good to their folks at home.
Think “gravy train.” And it’s the exact same way with the banks! Since all the money is contained inside banks, this cash flow stream is going to be protected by the powers-that-be.
But enough of politics and politicians. Let’s talk about making money from the banks … collecting money from them starting as soon as today (instead of the other way around!) … and doing it with weekly options. Be sure to check out today’s trading opportunity on the next page.
Learn Preston James’ Weekly Windfall Secrets here.
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.
P.S. If you haven’t checked out my free information yet, you should. As you know, any good trading strategy for stocks or options boils down to this: You need to have an edge of “why this stock, and why now.”
Well, back during the market disaster in 2001 (witness the dot-com collapse as well as 9/11), I discovered a study that revealed 86% of the time a company released a certain, little-known piece of news, it made the stock go up over the next 3-6 months (and it’s not an earnings announcement).
I’ll tell you exactly what this little-known piece of news is right here.
I know this will be a powerful addition to your trading arsenal, so go there now and discover what this is. I’m only making it available for a limited amount of time.
Learn about my Weekly Windfall Secrets here.
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