Expectations were relatively low for Friday’s PMI report from the Institute of Supply Management because of the government shutdown. However, the numbers released were very positive and have created a very attractive bullish opportunity in discount broker Charles Schwab (SCHW).
While it may not be obvious at first, success in the manufacturing sector has a connection to brokerage firms through yields. As manufacturers do better, yields rise and bonds fall in value. This is a significant advantage for brokerages that have been hurt by very low yields over the last few years. Brokers make money on the yield spread, which has been too low to add much to profits. You can see the impact that higher yields had on brokers starting in May of this year as investors sold bonds on anticipation that the Fed would begin tapering in September.
SCHW is at support and has bounced a little already. We are targeting the highs at a minimum in the short term. However, we expect momentum to carry the stock closer to $24.75-$25.00 per share in the short term. We strongly recommend using a limit order to enter the position.
Recommendation: Use a limit order and ‘buy to open’ the SCHW December 23 Calls (SCHW131221C00023000) for a maximum price of $0.95.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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