Back in early April I laid out my bearish view on U.S. banks stocks (XLF – Bank Shot), It was largely based on comparison to the price action of their European peers, and the reasons for their crashy price action:
It’s my view that the Fed has made a mess of their communication about their interest rate policy intentions. After nearly a decade the Fed raised interest rates in December off of the 0% bound, and given their commentary at the time, investors began to price 3 to 4 more rate hikes in 2016. Well, in January and February fears of a global slowdown and divergent monetary policies among the world’s major economies and the Fed’s rhetoric and hawkish tone was turned on its head, despite what appears to be improving economic data. It’s my view that the Fed does not want to raise given the fragile nature off our economy and the general weakness in emerging markets and Europe. This uncertainty has weighed on bank stocks as our banks need a steeper yield curve to make money!!
Here was the original trade idea from April 8th when the XLF was a bit higher than current levels:
I want to finance purchase of longer dated put purchases, assuming that nothing good happens between now and the end of the summer, and that this is a sector that should be sold on rallies.
*XLF ($22.10) Buy Sept 22 / May 21 diagonal calendar put spread for 90 cents
- Buy Sept 22 put for 1.15 (49 deltas – 49% chance in the money)
- Sell May 21 put at .25 (24 deltas- 24% chance in the money)
The May 21 puts expired worthless and now the position is simply a long September 22 put. With the XLF at $21.37, the Sept 22 put is now worth $1.37, or 47 cents more than our cost basis from 2 months ago. Not exactly a home-run, but we are set up fairly decently for re-test of the prior lows from last year in the high teens.
Now I want to roll the profits into a put spread in August expiration to dramatically reduce my premium at risk, and for all intents and purposes play with the house’s money.
ACTION: Sell to Close XLF ($21.37) Sept 22 put at $1.37 for a 47 cent profit
And now I want to roll this bearish view down a tad:
New Trade: Buy to Open XLF ($21.37) Aug 20 put for 47 cents
Rationale – Taking off the profit, shortening the duration of the trade, but only risking gains. On a move closer to the Aug 20 strike, we will look to spread by selling a lower strike put to further reduce premium at risk.
Regular readers will recognize this trading strategy with our Citibank trade update from June 14th: Update – $C: Rolling Sept Puts