3 Bank Stocks That Can Bank You Free Profits

bank stocksGo long with confidence in these three big-money financial plays

Donald Trump winning the 2016 U.S. election lit a fire under bank stocks, the likes of which we have rarely seen.

The thesis was doubly effective — half from the prospects of higher interest rates, and the other half from President Trump’s promise to greatly reduce regulation. Equity investors projected that bank profits would be unshackled, and that triggered a buying frenzy unmatched by any other since the financial debacle nearly a decade ago.

However, Wall Street usually overshoots on big stock moves, and this case was no exception. But while the financials have retreated from their recent highs, they’ve also consolidated well around current levels. This could create a solid base from which to mount another wave higher.

Furthermore, the macro picture is ambiguous enough that shorting it without a new cause would be dangerous. This greatly reduces the likelihood of sustained dips.

Some charts among the big bank stocks are looking technically frisky. So today, I want to share a few setups — two specific plays, and one that will cast a wider net. These are three bullish trades that will allow you to capture any upside from financial stocks, and with room for error!

Trade Bank Stocks for Free Profits: Bank of America (BAC)

I am a conservative investor, so instead of risking hard-earned money to buy Bank of America Corp (NYSE:BAC) stock at face value and without room for error, I will use the options market. This allows us to bet long near multiyear highs, as I recently demonstrated with this trade that yielded quick and easy profits.

Today I merely want to repeat this performance, but for a longer period of time and knowing I have profits in hand.

The Trade: Sell the BAC Dec $19/$18 credit put spread. This provides a 90% theoretical certainty to yield 14% on risk. With a 20% price buffer, if this spread is breached, I would likely opt to own Bank of America shares instead of defending the trade. I would also entertain selling the protection leg down the line to turn this trade into a sold naked put and capture more premium.

Trade Bank Stocks for Free Profits: Goldman Sachs (GS)

Goldman Sachs Group Inc (NYSE:GS) is a long-term proven winning financial institution. Management rarely gives traders reasons to short it, so as long as markets in general hold up, GS should meander higher.

Technically speaking, Goldman shares have an opportunity for a rally lying just above current levels. All the stock needs is a small nudge in price to start the process.

Usually I like to sell downside risk for easy profits, as I recently shared, but in this case there is upside risk to capture.

The Trade: With profits in hand I will buy the GS July $230/$235 debit call spread for $1.50 per contract. If Goldman Sachs rallies through my spread by mid-July, I stand to more than double my money.

I can sell either a Jan 2018 $180/$175 or even a naked $145 put to fully fund this purchase, but there’s no rush to do so. I’ll let some time pass so I can gain more clarity before I commit even more long risk to banks.

Trade Bank Stocks for Free Profits: Financial SPDR (XLF)

Lastly, I want to look at the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — an exchange-traded fund that holds the like of BAC and GS, as well as a number of other bank stocks.

The XLF trade: Sell the XLF Dec $21/$20 credit put spread, which is a bullish trade. This gives us a 90% theoretical chance to earn 18% on our risk.

Compare this with a straight-up buy, in which we’d need to risk $23.80 right here, then have the XLF to rally 18% by year end.

With my trade, all I need is for the ETF to stay above my sold risk.

I could balance this trade out by selling a bearish Dec $27/$28 credit call spread for a chance to more than double my potential income. Normally I would delay this entry, especially if the bank rally that I am expecting comes to fruition.

In all three cases, I am jumping the gun, anticipating the technical trigger for a rally. But in this uber-bullish environment, I am willing to do this knowing I have a good downside buffer. Otherwise, I could wait a few more ticks.

Note: Nicolas Chahine is the author of this article. Nicolas is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.

 

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Category: Options Trading Strategy

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