9:15am (EST)
Look for some news on Friday with some of the government’s top brass meeting to talk the upcoming “stress test”. I haven’t talked much about the event because I’m waiting for the actual news to come out but this evaluation will cover nearly 20 of the biggest U.S. banks and the report is due out on May 4th.
There have been some trading opportunities when it comes to the financial stocks and we have played them both ways. We used mostly call options to play the upside over the past month because the downside had reached a bottom back in late February, early March. Looking back now, you will notice that February 20th was the day Bank of America (BAC, $8.26, down $0.50) traded 840 million shares and hit a low of $2.53. The stock opened at $3.61 and hit a high of $4.09. Imagine the trading opportunities that day alone.
Citigroup (C, $3.25, up $0.01) hit a low of 97 cents and Wells Fargo (WFC, $18.18, down $0.63) sank to $7.80 on March 5th. Goldman Sachs (GS, $120.49, up $0.13) was at $72.78 on March 9th. The financial sector moves with incredible volatility but when these stocks rebounded, they rebounded pretty high.
A 50% move to the upside in a stock is reason to be cautious but what people are failing to remember is that Bank of America was a $40 stock at one point, Citigroup was a $27 stock, Wells Fargo was at $44. Goldman at $203. These prices are their 52-week highs, folks.
That means within one-year these stocks fell to ridiciously low levels as thoughts of bankruptcy and gloom and doom wreaked havoc on the sector. From $44 to $3 or $27 to $1, these moves are “Linda Blair” head-spinning. Of course, some of these firms are better off than others but which ones?
That should be answered shortly.
The key here is to figure before everyone else does.
However, we can still speculate. And that is the beauty of trading options.
One way to speculate the upside would be to use some cheap out-of-the-money options if you think some of these stocks will return to just their one-year highs. But you can’t buy a May 200 call option and expect Goldman to zoom to $200 within the next month. Especially given the run from $75 to $120 took nearly six weeks.
You can go way out though and buy options that are two years out. Think about that. These option contracts are called “LEAP” options. This is not a trade, but we could use Wells Fargo as an example. The January 40 2011 calls (VWFAH, $2.00) do not expire for another 16 months. So if you expect Wells could double from current prices by January 21st, 2011 then these calls would be a place to start your research.
It is not a bad idea but then again I’m not ready to buy options that long out because it would be like buying a stock and holding it for a couple of years. I don’t do stocks because I trade options but some of these stocks are trading at option prices!
I like what LEAPs provide as an alternative trade but when going this far out in the option chain do some research before tying your money up for that long.
Futures are up this morning and it is looking like Tech will be strong this morning. That’s good news for us.
Rick Rouse
Rick@OptionsMentoring.com
