European and Asian banks have been some of the worst performing equities in the world during 2016, causing investors in U.S. bank stocks to fear that the crush in global yields will continue to squelch profitability, with the backdrop of some sort of banking crisis emanating from the trouble spots.
There were a couple options trades that caught my eye earlier today in U.S. banks worth discussing. They appear to be from a long holder of Citi (C) and J.P. Morgan (JPM) looking to add some yield over the next 18 months. The trades were crossed at the same time on the same exchange and look to be from the same investor.
When C was trading $40.90 at 1pm 8300 of the Jan 2018 55 calls were sold to open at $1.59. If these were in fact an overwrite of a long position then the investor would receive about $1.32 million in premium if the stock is below $55 on Jan18 expiration, adding 3.9% yield over 18 months to its existing expected 1.6% dividend yield. If the stock is $55 or higher, the investor could have their stock called away at $55, up about 34%, implying a call away level of $56.59, up 38% from the trading level. Remember that an investor who overwrites a long position can always cover the short call portion to avoid being called away.
A quick gander at the C chart since the start of 2010 shows massive overhead technical resistance between $50 and $55:
[caption id="attachment_64820" align="aligncenter" width="600"]
C since Jan 2010 from Bloomberg[/caption]
And in JPM, when the stock was trading at $60 at 1pm, 5500 of the Jan 2018 70 calls were sold to open at $2.79. If these were in fact an overwrite of a long position then the investor would receive about $1.53 million in premium if the stock is below $70 on Jan18 expiration, adding 4.65% yield over 18 months to its existing 3.2% dividend yield. If the stock is $70 or higher, the investor could have their stock called away at $70, up about 16%, implying a call away level of $72.79, up 21% from the trading level.
JPM has obviously been a massive relative strength leader among global bank stocks, with the 2015 high just above $70 a massive technical target on the upside, while the 2013 breakout level, and the August 2015 flash crash low apparent long term technical support at $50:
[caption id="attachment_64822" align="aligncenter" width="600"]
JPM since Jan 2010 from Bloomberg[/caption]