I recently wrote about financial stocks and how they needed to lead the next leg of any possible rally.
Well, they performed well last week, helping to set up a couple of trades:
The Financial SPDR (XLF) was strong throughout last week and finished just below its 50-day moving average. Support at $23 was solid as a rock, and a golden cross officially formed on the chart as well. Continued closes above $24 would be bullish. Additional resistance is at $24.25-$24.50. A close above the latter could get $25 and the 52-week high of $25.62 in play.
The XLF Jan $24 calls (XLF160115C00024000) are only in the money by a penny, so these options are mostly premium. While bullish traders could target these calls for a short-term trade, the problem is that these options expire in less than three weeks.
However, the risk/reward is compelling, as these options would double, technically, if XLF shares are trading at $24.80 by mid-January. This would only require a 3% move in XLF shares by mid-January for the aforementioned call options to double. The only problem is that this weekend is another three-day holiday weekend; U.S. markets are closed this Friday on New Year’s Day.
The XLF Feb $25 calls (XLF160219C00025000) are nearly $1 out of the money, but they would provide an extra month for the trade to play out. This trade would break even if XLF shares are at $25.22, technically, by the closing bell on Feb. 19. These options would double from current levels if shares of XLF trade above $25.45 by late February. This would require shares of XLF to rally nearly 7%.
As far as the banking stocks go, Wells Fargo (WFC) is challenging $55 again after forming a golden cross last week. The chart below shows major resistance at $56, which is a level that has previously failed three times since early November. A move above this level would be super bullish for a possible run at $58 and fresh 52-week peaks north of $58.77.
I have talked before about the timeframe for the WFC January and February options, and I have added a possible WFC option play to my watch list. The WFC Feb $57.50 calls (WFC160218C00057500) look attractive at current levels. Shares would need to push $58 by Feb. 19 to break even on the trade, but these call options would return 100% from last Thursday’s close if shares trade above $58.35.
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