Bank stocks have awoken just in time for the holidays. Look no further than the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) to chronicle the excitement. Spectators who didn’t catch the breakout will be happy to know KRE has returned to the scene of the crime.
You’ll recall the financial sector was perhaps the biggest beneficiary to the capital inflows following last November’s election. KRE and its companion ETF, the Financials Sector SPDR Fund (NYSEARCA:XLF), both screamed higher adding some 20% to their coffers in short order.
But since then, the entire sector has been mired in a big, sloppy range. Perhaps the pause was justified given the enormous post-election gains. Maybe banks needed time to digest the ascent and work through overbought conditions.
Of course, KRE didn’t need to take a year to do so, but the silver lining is it now has a long-term base to launch from.
And remember the old chartist saying, “the longer the base, the higher in space.” The recent breakout carried KRE well above the $58 resistance zone on heavy volume to boot. This week’s bout of profit-taking has returned the fund to old resistance. Should the principle of polarity hold true, this old ceiling will become a new floor.
And that makes this pullback a rousing buy.
The recent tax cut talks have enhanced volatility in the marketplace. KRE now carries an implied volatility rank of 74%. Although it has retreated slightly over the past few days, it’s still quite elevated. And that suggests selling puts is a worthwhile trade here.
While its $59 price tag is low enough for a naked put play, I’ll suggest bull puts to keep the capital requirement minimal. Sell the Jan $55/$51 bull put spread for 40 cents. Consider this a bet that KRE sits above $55 at expiration. If it does, you will capture the max reward of 40 cents. The cost of the trade is $3.60, which means the potential return on investment is a respectable 11.1%.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.