The brokerage industry has lagged the most recent rally while defensive sectors broke out. Ideally we would like to see the market correct a little before anticipating that more aggressive sectors like finance are due for another extension to the upside — but with buying pressure emerging from Asia and compelling technical signals within the group, we think an entry in a bullish position in TD Ameritrade Holding Corp. (NYSE:AMTD) is well worth the risk.
AMTD formed a nice support bounce on a confirmed “hammer” on April 5. Our target based on this pattern alone would be close to $22 per share; however, we think there is more to the story.
AMTD is reporting earnings tomorrow, which should be very interesting. Unlike some of its peers, including The Charles Schwab Corp. (NYSE:SCHW) and E*TRADE Financial Corp. (NASDAQ:ETFC), AMTD has been an asset acquisition engine during the last few years by offering premiums for deposits. Because interest rates have been so low, assets at other brokerages have not been as profitable as they would have been normally — but AMTD has found a successful solution for that problem.
They have been able to successfully drive derivatives trading (options) very aggressively. Much more of its trading revenue comes from that activity than is standard in the industry. Because of this, the pessimism from traders about the first-quarter rally actually plays to AMTD’s strengths. If traders are betting against the trend, or merely hedging away some of their risk, they tend to do so through derivatives.
This means that AMTD has likely been benefiting from an increase in general trading activity (due to the bull market) and from their focus on derivatives as well. The potential for a positive surprise on Tuesday morning is high, and it’s possible that we may see investors continue to drive the stock much higher before that time in anticipation of the same factors we are considering now.
Use a limit order to ‘buy to open’ the AMTD May 20.50 Calls for a maximum price of 65 cents. AMTD has a reasonably liquid chain sheet, but the spread can be a little wide, so make sure to use a limit order to prevent an entry at an adverse price.
Click here to receive the Trade of the Day in your inbox every day.
Investor Place 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.