9:00am (EST)

Now that the stress test has come and gone for the banks, it didn’t take long for the ones who needed new capital to raise money. Last week, 19 banks were examined to determine their ability to weather a deep economic downturn. After weeks and hype and anticipation, it was determined that 10 of them, or over 50%, needed to raise a combined $75 billion.

It was a no-brainer these firms would hit the pavement as early as they could. We saw it last week with Wells Fargo (WFC, $26.53, down $1.65) and Morgan Stanley (MS, $26.07, down $2.13). The two together sold nearly $12 billion of stock.

On Monday, it was Bank of New York Mellon (BK, $29.55, down $2.60), BB&T (BBT, $24.34, down $1.99), Capital One Financial (COF, $27.10, down $4.24) and U.S. Bancorp (USB, $18.50, down $2.04) picking the market’s pocket.

The financial stocks have soared from their lows in early March but worsening credit conditions in housing, credit cards and commercial loans could put a halt to the rally. At least for the moment.

I have been winding down my trades over the past couple of weeks because we have been mainly doing a lot of call option buying. That has worked for 8 weeks now and even before that but the recent action in the market has me seeking protection.

I talked about one last push for the market in the Weekly Wrap but had mentioned the bulls were running out of excuses to take us higher. But Monday’s have been lousy for the market and yesterday was no different.

The only exposure we had were the Blackstone Group (BX, $12.64, down $1.20) trades. Close out the May call options this morning, they expire Friday anyway. If the stock falls below $12, close out the June and January call option trades.

One trade I would like to do this morning is a Wells Fargo strangle trade. Wait 20-30 minutes after the market opens and buy equal amounts of the June 30 calls (FHUFD, $1.35, down $0.50) and the June 23 puts (WFCRI, $1.25, up $0.10). All we need is the stock to move 20% or more in either direction and this trade will be profitable. We may get the chance to make money on both sides.

The best part of the trade is that it offers protection both long and short.

Futures are pointing towards a higher open…

Rick Rouse
Rick@OptionsMentoring.com