Trade of the Day: Ally Financial (ALLY)

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The banks have been touted left and right on financial media outlets of late because they are trading at low-double-digit P/Es and at or below book value. But, man, they continue to be sold as if they were carriers of the Zika virus, fronts for ISIS and giving their customers E. coli infections.

Check out the KBW Bank Index (BKX). The big banks have not made any progress for the past 19 years! Yet that’s not enough. Citigroup (C) has fallen another 7% this week, Goldman Sachs (GS) fell 6%, and Morgan Stanley (MS) fell 5.5%.

Suffice to say, I am steering clear of the banks … except, of course, to short them. In my Trader’s Advantage service, I am short several financial firms, and there’s one I want to put in front of you today.

banksAlly Financial (ALLY) was spun out of GMAC a couple of years ago and still serves as the financing arm for a lot of General Motors (GM) and other dealers’ sales forces. Shares came down along its 40-day average last year, crashed in January, rebounded a bit in February and are now on course to head back toward lows.

Short (sell to open) ALLY at $16.50 limit, good till canceled.

It closed just a touch above that level, and looks good for a decline later in the week. Buy back to close and cover all at the final target of $14.90 limit, good till canceled, and set stop at $17.25 limit, good till canceled.

Shorting may be a new strategy to some of you, so I’ll review the basics, and your broker will be able to help you if you’re interested in profiting from shorting stocks.

Shorting is a strategy to use when you expect a stock’s price to go down.

To short a stock, you borrow the shares from your broker, and then sell those shares to the open market. Because you’re selling something, you collect the money at the start of the transaction, just as you would if you were selling a car, a phone or any other item. The general idea is to sell to open the shares high, and then buy them back later at a lower cost to return them to your broker. This is called covering.

You must have a margin account and permission from your broker to short a stock. Each broker will have slightly different requirements for opening and using margin accounts but, in general, to open what’s known as a Regulation T (or “Reg T”) margin account, you just need $2,000 in additional money that is not allocated to any other securities. Your broker can answer specific questions about any other requirements and fees associated with shorting.

When shorting a stock, to initiate the trade, you “sell to open” the shares. To cover a short trade, or when you’re ready to close it, you “buy to close.”

Again, your broker can help you review other requirements for shorting stocks, but it’s a strategy I use to make quick profits when stocks or entire indices go down.

Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Follow him on Twitter for his latest take on markets and innovation.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/ally-financial-ally-banks/.

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