U.S. Bank earnings start off with a bang tomorrow morning with Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC). The three combined make up about 27% of the of the weight of the XLF, the S&P Financial Select etf. Last night on CNBC’s Fast Money I detailed a hedging strategy for holders of some (or all) of the components of XLF, looking out to April expiration. It will also catch some of the early Q1 reports:
I don’t have much more to add on the group aside from my commentary Monday morning:
the most important take-away here is expectations vs current sentiment… which is white hot. There is a decent chance that many of these banks will report results better than current consensus estimates, but given how quickly sentiment turned, how quickly rates moved and how much the stocks in the group have gone higher, It was take a string of impressive beats and raises to keep the upward momentum going.
I think it is worth taking a closer look at WFC specifically the phony account scandal that rocked the bank in the 2nd half of last year makes the stock a bit of a wild-card. Any commentary about winning back consumer trust will be company specific.
The implied move in the options market is about 2.5%,with the stock at $54.40 the Jan13th weekly 54.50 straddle (the call premium + the put premium) is offered at $1.40. If you bought that and thus the implied move, you would need a rally above $55.90, or a decline below $53.10 to make money on tomorrow’s close.
The stock’s 20% gains since the election is a tad above the XLF’s 17% gains, but company specific news could make it vulnerable relative to the sector.
WFC topped out in July of 2015 near $59, and to its recent lows in early Oct 2016 sold off 25%. only breaking the downtrend following the election.
Long holders of WFC who worry about headline risk, but love the 2.8% annual dividend yield, well above JPM’2 2.2% might consider protection over the coming months. Here’s one way to do that:
vs 100 shares of existing WFC stock at $54.40 buy the Apr 52.50 / 45 put spread and sell the Apr 60 call. The entire hedge costs 30 cents
- Buy 1 Apr 52.50 put for 1.95
- Sell 1 Apr 45 put at .40
- Sell 1 Apr 57.50 call at 1.25
Break-Even on Apr expiration:
Profits in the stock of 3.10 up to 57.50 (less the .30 paid), called away above that.
Losses in the stock down to 52.20 (the long put strike less the .30 paid)
Protection of up to 7.20, or 13% between now and Apr expiration below 52.20 down to $45. There is no protection below 45, but at that point the hedge would have mitigated 13% of any decline to or below that level.
Rationale: $45 is healthy long term support while $58, the Dec high should serve as decent near term technical resistance.: