Trade Summary: September 19, 2016

| September 19, 2016

September 19, 2016

 

Trade Rationale

The biggest risk for stock investors these days is interest rate risk.  Higher interest rates could lead to a selloff in stocks, depending on the magnitude and frequency of the rate hikes.  Basically, anything but the most conservative increase in rates could lead to investors quickly heading for the exits.

However, interest rates going up aren’t bad for everyone – especially if the Fed is careful and transparent about its intentions.  Most financial companies stand to gain quite a bit from higher rates.  Banks in particular could see a major boost to their bottom lines from elevated rates.

As such, we’re going to buy calls in two financial companies which should benefit from higher rates.  We’re also going to grab puts in a company that could be hurt by rates going up.

We’ll start with calls in Morgan Stanley (MS).  Morgan is more of an investment bank than a retail bank, but still could gain quite a bit from higher rates, especially when it comes to fixed income product sales.  The stock is also trading at just 10.6x projected earnings.

The next company to look at for call buying is Western Union (WU).  The payment services company would certainly benefit from higher rates, particularly with all the cash it has to keep on hand for consumer use.  The stock is also trading at a very cheap valuation of just 11.7x project earnings.

Moving away from financials, let’s buy puts on Lions Gate Entertainment (LGF). In terms of companies that could get hurt by high rates, look no further than LGF. The movie production company has a boatload of debt and a very limited amount of readily available currency.  At current levels, any threat of higher rates could scare LGF investors away in a hurry.

 

Trade Details

#1) Buy Morgan Stanley (MS) November 18th 32 Calls up to $1.35

For this trade, we’re looking for a move higher in MS.  Our first profit point for conservative traders is at $34.  For aggressive traders, you can hold up to $36.  For risk control, the conservative exit level is $28.  Lastly, $26 is the final exit level for aggressive traders.

Morgan Stanley

#2) Buy Western Union (WU) November 18th 20 Calls up to $1.00

With this trade, we’re also looking for the stock to climb.  Our first exit point for conservative traders is at $21.  For aggressive traders, you can hold to $22.  For risk control, the conservative exit level is $28.  And, $26 is the final exit level for aggressive traders.

Western Union

#3) Buy Lions Gate Entertainment (LGF) December 16th 20 Puts up to $2.25

Finally, we’re looking for a down move in LGF.  Our first profit-taking exit point for conservative traders is at $19.  For aggressive traders, you can hold to $17.  For risk control, the conservative exit level is $23, while $25 is the final exit point for aggressive traders.

Lions Gate Entertainment

 

Category: AOA Trade Summary

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