Bank stocks have gone nearly straight up since bottoming on Jan. 24. The broad market recovery is helping, but interest rates are the actual driver of the outperformance.
Though the Federal Reserve has yet to lift the Fed Funds rate, the market is already pricing in six increases this year. Bond yields are ripping higher with the 10-year closing in on 2%.
The higher level brings bigger profits to bond buyers while allowing banks to charge more on loans. The net effect is to boost the earnings potential for financial companies across the land. Of course, a strong economy helps too. As far as the outperformance goes, XLF, the Financial Select SPDR Fund ETF (NYSEARCA:XLF), is up 12% from last month’s lows. The S&P 500 is only up 8%.
There are plenty of bullish charts to choose from. Here are my favorite bank stocks to build trades on.
Let’s look at the charts and explore an options trade idea on each.
Bank Stocks Flying High: Berkshire Hathaway (BRK.B)
Berkshire Hathaway has been banking on the rotation into value stocks. It blasted above $300 at the beginning of the year and was able to stick the landing on the retest. With today’s gain, the bank stock is back to a record high. Prices are perched nicely above a rising 20-day, 50-day, and 200-day moving average. Though we’re slightly overbought in the short run, any weakness from here is a gift.
The high price tag makes the stock too rich for buying calls. So instead, use a vertical call spread for a high potential return if BRK.B keeps running.
The Trade: Buy the April $330/$345 bull call spread for $6.
You’re risking $6 to make $9 if prices rise beyond $345 by expiration.
Morgan Stanley (MS)
Morgan Stanley shares spent the past six months imprisoned in a range. Resistance held firm at $105, rejecting five rally attempts. And then, it failed. With this week’s rush into bank stocks, MS finally broke out of its range. Departing a long-term base is a highly bullish omen and makes for an easy trade idea.
As long as the stock is above $105, the path of least resistance is higher. Because its history has quite a bit of chop, I don’t expect a straight shot higher. But, if the breakout is legit, pullbacks should be shallow, and consolidation patterns should resolve themselves higher.
Once again, I like call vertical spreads as a cheap way to capitalize.
The Trade: Buy the April $105/$115 bull call spread for $4.60.
You’re risking $4.60 for the potential to make $5.40 if MS stock sits above $115 in two months.
Bank Stocks Flying High: Bank of America (BAC)
Bank of America rounds out today’s bank stocks ideas with a looming breakout. The psychologically significant $50 zone ended the last upswing, and we’re back to testing it a second time. Given the tailwind of the booming 10-year, I think this attempt will succeed. Moreover, the overall trend is healthy, with price climbing above all major moving averages.
Like Berkshire Hathaway, BAC stock is slightly extended in the short run, but I’d view any weakness from here as a gift. The low-dollar price tag makes it easy to build a poor boy covered call.
The Trade: Buy the May $47 call while selling the 11 Mar $51 call for a net debit of $3.60.
The ideal scenario is to have BAC drift higher to $51 over the next month. The max gain is around $1.00.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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