Something isn’t rotten in Denmark. The bad news is Europe’s biggest actors, the bank stocks, do stink technically. The good news is investors can gain some portfolio protection by shorting giants Lloyds Banking Group PLC (NYSE:LYG), Barclays PLC (ADR) (NYSE:BCS) and Deutsche Bank AG (USA) (NYSE:DB) with limited risk options.
There’s been a lot of hope and bullish pandering with excuses like TINA, short for “there is no alternative,” to push the U.S. market to all-time-highs over the past month. But European bank stocks LYG, BCS and DB tell a different story and remain defiantly bearish in their price action.
Now, with the European financial system’s stress tests complete and despite moving mostly past regulators, it’s time to “sell the news” and short these bank stocks before any relief-felt celebrating fades with the realization problems still exist.
With failed or still-floundering Central Bank policies that have investors chasing negative yields — and debt-ridden countries still in need of more helicopter money like a junkie requiring another fix for that doomed habit — we don’t see a happy ending, and even more so in LYG, BCS or DB.
Having said this, let’s examine the charts for these select bank stocks individually and formulate bearish strategies with defined risk in mind.
At a minimum, these bearish positions can act as a cheap hedge for your portfolio. And potentially, these strategies may yield net profits if all goes ‘not’ according to plan, per today’s bulls blissfully discounting the ills and impact of these bank stocks.
European Bank Stocks: Lloyds Banking Group PLC (LYG)
State-owned financial giant Lloyds is synonymous with the strength of Britain’s economy — and on its price chart, LYG is far from receiving a clean bill of health.
The monthly view of LYG provided below shows this bank stock’s falling fortunes since the low of the markets global financial crisis in spring 2009. Currently LYG is testing those levels from seven years ago.
Shares of LYG could always find support, but with Europe’s more singular financial debacle of 2011 putting in a low some 50% below current levels for LYG and a bearish stochastics cross, we’re expecting this bank stock to continue sinking.
Regarding an options strategy in this bank stock, the October $3 put for up to 35 cents looks like an attractive bearish position to hedge the portfolio with.
With LYG at $2.86 as of Friday’s close, the contract is already slightly in-the-money and should a revisit of 2011’s lows occur over the next three months, a return in excess of 300% is possible.
European Bank Stocks: Barclays PLC (ADR) (BCS)
Next up on our list of bank stocks to short is Barclays. Shares of BCS are a bit different than Lloyds in that its 2009 low wasn’t seriously challenged during the 2011 crisis. That’s not to say shareholders were happy, but a low of $8.38 is much better than the $2.75 BCS printed back in 2009.
Currently, 2016’s post-Brexit price action has been troubling for this bank stock. BCS has broken 2011’s low and had trouble reversing higher. Were shares to break to fresh lows, there’s little if any technical support prior to BCS establishing a full-blown test and visit to 2009’s low.
To take advantage of BCS breaking lower and without having to commit too much capital, the Dec $6 put for up to 20 cents or Dec $7 for up to 40 cents are priced well.
If this bank stock were to revisit its 2009 lows this year, the puts could in value by more than 1600% and 1000% respectively.
With a commitment of just 2.5% and 5% of this bank stock’s underlying price and nearly five months of hedge value, either of these two puts offer a nice way to reduce systemic risk and add some likely bearish diversification that should clean up in a calamity.
European Bank Stocks: Deutsche Bank (AG (USA) (DB)
“Deutsche Bank is not Lehman Brothers.” That’s a popular counter, and it could be true as the maligned derivatives angle of the company’s risk, is likely ill-conceived.
Nevertheless, investors didn’t understand bank stocks or Lehman’s real problems until it was too late — and while it may not be a repeat, the market does rhyme, and often unexpectedly.
For this reason and a price chart which hints this time may not be different as DB is already trading lower than its 2009 low; this is yet another good short and portfolio hedge to consider.
For an options strategy, I like the DB Jan $11 put for up to $1. This is the most expensive put of the three names. But given the contract’s six-month maturity, risk that’s contained to about 8% and DB demonstrating relative weakness, it makes for an interesting bearish standalone position or way to guard against systemic risk to the portfolio.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.