The Financial stocks look like they may be setting up for another run higher. The sentiment for these stocks can change daily but the recent developments with Merrill Lynch (MER, $27.13, up $0.88) may actually be a good things. Merrill has been raising capital and selling troubled investments which will greatly reduce risk to the company moving forward. Other banks may follow suit.

News this morning that the Federal Reserve is going to extend its emergency borrowing program for investment banks could also lead to a small rally. The program will also be available to commercial banks as well and will allow bids on cash loans that last for 84 days, along with the 28-day loans that are now available. The previous plan was set to expire in September but has now been extended through January 30, 2009.

I had profiled a few longer-term call options a couple of weeks ago and we were able to ride most of them for average gains of 50% in less than a week. I’m going with the same plays again although our holding period may be longer. The market could be setting up for another rally and Friday’s unemployment report will have a huge impact on the market. If all is well, we could be starting August with some sort of rally.

I still don’t trust Merrill Lynch as a company so we will see. The January 35 calls (MERAG, $2.00, up $0.20) were first profiled at $1.90 and we exited them in the $2.65-$2.75 range. Some of you may have gotten out at even higher prices as the calls hit a high of $3.35. I like entry points here at these levels as this could be a “trading bottom” for Merrill Lynch.

Citigroup (C, $18.87, up $0.42) has traded as high as $19.50 this morning but many of the financials popped at the open. The January 20 calls (CAD, $2.30, up $0.27) were originally profiled at $1.25 and were sold at $2.60 the first time around. I like them again even at current prices. The January 22.50 calls (CAA, $1.42, up $0.19) can also be considered.

Wachovia (WB, $16.85, up $1.15) is the first bank I think will eventually get bought and maybe a bid from Goldman Sachs (GS, $183.74, up $2.11) will surface down the road. The January 15 calls (WBAC, $4.70, up $0.60) were first mentioned at $1.30 and $2.60 was our exit point. The stock went on a wild ride the day it announced earnings, trading lower before skyrocketing higher. These calls are much higher than our original entry price so we are going to move to the January 20 calls (WBAD, $2.25, up $0.25).

The average cost to buy one contract for any of these plays is around $200. They are all still considered “lottery plays” but I’d rather be picking on where their stock prices will be in six months instead of trying to pick a 3-digit number for a daily draw.

Rick Rouse
Rick@OptionsMentoring.com