Banks Bounce Back
Federal Reserve Bank
There’s been big news coming out of the finance sector of late, and that’s caused a lot of trading in the biggest companies in the space. It’s also caused some hefty trading in exchange-traded funds (ETFs) pegged to the financial industry. Of course, there’s also been plenty of action for options trading investors.
The biggest news came on Friday, March 18, when the Federal Reserve announced that it would allow many of the nation’s biggest banks to raise dividends. The move sparked a rally in the banking sector that day, but not every stock participated. There’s also been news of a reverse stock split in Citigroup (NYSE: C), while Bank of America (NYSE: BAC) was refused permission to raise its dividend.
So, what does this diverse news mean for options traders, and how can you profit from the latest developments in the space? Here are five bank sector options for a changing financial landscape.
Citigroup (NYSE: C)
Citigroup Logo
The once-mighty Citigroup (NYSE: C) is moving forward on its 1-for-10 reverse split that is scheduled to take effect after the close of trading on May 6. That will most likely mean much less volume in Citi options, as its once very low price prompted many traders to buy multiple contracts in hopes of a low-cost, big score. While it’s true that overall trading volume in Citi option contracts will be lower, that doesn’t mean you can’t make money in the space. Citi did receive permission from the Fed to reinstate its dividend, and it plans to do so in the second quarter. That could give the stock a boost, and if it does, holders of the C Jul 2011 5 Call will be rewarded handsomely.
Bank of America (NYSE: BAC)
Bank of America Logo
One of the big banks that was not given the okay to resume dividends was Bank of America (NYSE: BAC). The Federal Reserve rejected a plan by the company to “modestly” increase its dividend this year. Apparently, the Fed doesn’t think BofA’s fiscal house has been cleaned up enough to start giving a little more back to shareholders. The news was definitely a setback for the nation’s biggest bank; however, aggressive options traders may want to take a chance with a buy-the-dip strategy in the beaten-up stock. One way to do so is to buy the BAC May 2011 14 Call.
J.P. Morgan Chase & Co. (NYSE: JPM)
JPMorgan Chase logo
Immediately after the news broke that the Fed had given JPMorgan Chase & Co. (NYSE: JPM) the green light to hike dividends, it did so. The company said it was upping its quarterly payout by a whopping 20 cents to 25 cents a share, a big increase that sparked confidence in the shares. Traders who think that confidence will carry on over the short term and be reflected in the price of JPM shares should look at the at-the-money JPM May 2011 46 Call as a potential way to score on the next wave higher in the banking giant.
Wells Fargo & Co. (NYSE: WFC)
Wells Fargo logo
Another giant bank that broke out the piggybank as soon as the Fed gave it the okay was Wells Fargo & Co. (NYSE: WFC). It announced a special dividend of 7 cents a share, boosting its total quarterly payout to 12 cents a share. The move to increase payouts could continue to inspire a move higher in the shares, but what also could be a positive for WFC shares is the recent support for the stock from billionaire investor Warren Buffett. His Berkshire Hathaway (NYSE: BRK.B) recently told federal bank regulators that it believes Wells Fargo still is undervalued at current levels, and that the shares will rebound. Options players can bet alongside the bullish Buffett with the WFC May 2011 33 Call.
Financial Select Sector SPDR (NYSE: XLF)
Financial Select SPDR XLF logo
If you’re a banking sector bull, but you’re not sure of which particular bank to place your bet on, then check out the Financial Select Sector SPDR (NYSE: XLF). This exchange-traded fund contains the biggest banks on the block, including Citigroup, Bank of America, J.P. Morgan and Wells Fargo. If you want a bullish option play with broad exposure to the financial sector, then look at the XLF May 2011 17 Call.
At the time of publication, Jim Woods held no positions in any of the stocks, funds or options mentioned in this article.
