Earnings season is upon us, and as usual, bank stocks led the way. If you couldn’t tell by this week’s rally in the S&P 500, the market cheered the results. With the recent gains, more upside could be on the way. Today, we’ll look at three bank stocks to buy.
Seasonality is also aiding the bulls’ cause. The fourth quarter has a history of bull runs in equities. And while deteriorating economic data could be the yin to seaonality’s yang (thus thwarting a year-end ramp), the charts remain in favor of buyers.
Since the trend of bank stocks lacks the firepower or momentum of other sectors like technology, we can use the options market to build positions that profit from their slower-moving nature.
We’ll take a closer look at how to do so in three of my favorite bank stocks below.
Bank Stocks to Buy: JPMorgan Chase (JPM)
JPMorgan Chase (NYSE:JPM) is without a doubt the best of breed in the banking space. And I don’t even need to dive into fundamental analysis to make the case. The price chart tells all. Just this week, JPM stock jumped to a record high at $121.59 after smashing earnings estimates.
Previously, JPM had been working on an 18-month trading range. Breaking out of such a long-term base is bullish. By comparison, the financial sector remains 8% off of last year’s highs.
Implied volatility dropped significantly after earnings — and now JPM stock options are cheap. Let’s structure a bull call diagonal spread to profit from neutral to bullish price movement over the next month. Buy the Jan $115 call while selling the Nov 22 $122 call for a net debit around $6.30. The trade should profit as long as JPM sits above $119 at expiration.
Bank of America (BAC)
While Bank of America (NYSE:BAC) doesn’t boast the relative strength of JPM, it has rallied to the upper end of its 2019 trading range after posting solid earnings numbers. A break above $31 resistance would bring breakout buyers running, but we can structure a spread to profit even if BAC stock simply consolidates near the ceiling.
Like JPM, BAC’s implied volatility is in the tank making long premium plays the way to go. We’re going to buy a longer-term call option and sell a short-term call against it to create cash flow. Buy the Jan $29 call while selling the Nov 22 $31 call for a net debit around $1.67. You will capture a profit as long as BAC sits above $30 at expiration.
Citigroup (NYSE:C) stock has followed in the footsteps of Bank of America this year. Both price charts look similar. Like BAC, C stock is testing the upper end of its 2019 range after earnings, and it sits above all major moving averages. Until resistance near $72.50 gives way, it’s hard to get overly bullish. And that’s why cash flow strategies that profit from time decay and sideways action are preferable to aggressively directional bets here.
Implied volatility is low at the 14th percentile of its one-year range, so we’ll deploy a long premium play. Buy the Jan $65 call while selling the Nov 22 $71 call for a net debit around $5.05. The strategy positions you to profit as long as C is above $69 at expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!