MorningWord 11/26/13: Here is a news flash to regular readers of this space – I have not been a raging bull in this raging bull market. But readers of the site know that our real bread and butter at RiskReversal isn’t our macro call, but rather our trade ideas – both long and short, so no matter whether you’re a bull or bear, with options, it often doesn’t matter. Money can be made in any market.
We are traders and we pride ourselves with finding actionable ideas on both sides of the fence, no matter what our macro view is. Financial stocks are a good example of a sector that we have avoided most of the year, as it became apparent early in 2013 that the “fix was in” for the stocks. We have not agreed with the reasons for the “fix” but the sector’s multi-month consolidation and lack of participation as the broad market has made new highs caught our eyes of late. If there is a blow off phase of the rally coming, then this sector will be sure to participate.
Oh, and we also hope readers come to RiskReversal to see how we use options strategies to express views in the equity markets, in an effort to better define risk, add yield or properly add leverage.
As the Fins are starting to get their mojo back as most major averages are topping nice round numbers (SPX 1800, Dow Jones 16,000 & Nasdaq 4,000) we are not proponents of just getting long the stocks for breakouts, but as we did with XLF last week (Adult Swim Trade – $XLF: Bank Deposit) we created trade structures that we think offer superior risk/reward to long stock.
One thing is fairly obvious from our chart work though – the technical setup in most of the bank stocks is providing a tidy little roadmap for options traders looking to play, at least from the standpoint of picking strikes.
For instance, despite Implied Vol being very low in the space (making option sales less attractive), those looking to Sell Puts to finance the purchase of calls to create bullish structures, or those looking to add yield at support / resistance, have some obvious levels. Here are two banks stocks on our radar for potential trade candidates:
First, JPM, $50 should be the line in the sand for a while as downside support, one year chart below:
But the stock is quickly approaching very long term technical resistance at $60, 14 year chart below:
While playing for a breakout looks attractive on a short term basis, the better play maybe a range trade btwn $50 and $60, for longs looking to add yield by selling the range, or savvy options traders looking to collect some premium if the stock remains contained.
On the flip-side there is GS, yet to breakout above near term resistance, with $150 on the downside looking like very staunch near term support:
Backing GS out a bit with an 8yr chart, the stock’s recent consolidation looks poised to test the 2009 high of $193.60, and who knows maybe a test of the 2007 all time highs of $250:
GS could be a prime candidate for bulls to sell put and buy call playing for a 10-15% move to prior resistance.
As we evaluate new trades in the space, most important of all is risk management of the trade after initiation. In that vein, we’re watching our short put strike on the XLF trade, with the intent of closing that short put for limited premium if the financials sector shows further strength in the coming week.