4 ways to trade big banks

Bank of America and Citigroup are setting up beautifully from a technical perspective.

By InvestorPlace Aug 26, 2014 12:01PM

Credit: © Chris Keane/Reuters
Caption: A Bank of America sign at a branch in Greenville, S.C.By Anthony Mirhaydari


Big-bank stocks have enjoyed a lift over the last few trading sessions, helping the Financial SPDR (XLF) recover from its early August selloff to push to new all-time highs Monday.


There are a few catalysts in play. For one, with the geopolitical tensions diminishing in Iraq and Ukraine, and with central banks in no hurry to pull back on economic stimulus, the overall market is enjoying a surge of buying interest.


But there sector-specific factors in play as well. Last week, Bank of America (BAC) reached a near $17 billion agreement with the Department of Justice to settle charges of misleading investors during the housing boom -- essentially resolving nearly all the legacy legal overhang related to the acquisition of Countrywide and Merrill Lynch.


I think the run higher will have legs not only to the end of the housing-related overhang but also because of the prospect for better net interest margins (difference between loan and deposit rates) as the Federal Reserve prepares to wind down its QE3 bond purchase program.

This, along with the strength of the economy, should cause long-term interest rates to halt their recent decline and rebound higher widening bank interest margins.


For the conservative, simply buying the XLF or the BAC common shares would be the way to go. For the more aggressive, here are four options plays on bank stocks that I've recently recommended to my Edge Pro clients:


Citigroup

Citigroup (C) has pushed aggressively over resistance near $51 that has constrained the stock since January. Volume is good. And we're now looking at the first upward cross of the 20-day moving average over the 50-day since September 2012.


In other words, this is the best uptrend setup in Citigroup in two years.


In response, I've recommended two separate call option plays. The Sep $50.50 calls (which can be bought at $1.56 currently) are up nearly 70 percent since clients added them on Aug. 21. And the Oct $50 calls ($2.46) are up nearly 40 percent over this time.


I'm looking, at the very least, for a return to the January high near $55 in the weeks to come. At current prices, these two contracts should rise, on intrinsic value alone, to gains of 290 percent and 203 percent, respectively, if that happens. If you sell before expiration, obviously results will be padded by remaining time value as well.


Bank of America

Bank of America, in a pattern similar to what's going on with Citigroup, is moving up and over multimonth resistance after falling below its 200-day moving average back in April. Shares have another 10 percent of upside from here to return to their March highs.


I've recommended the Sep $16 calls (45 cents currently), which are up more than 63 percent since Aug. 21, as well as the Oct $16 calls (64 cents), which are up nearly 40 percent.


I'm looking for a push to $17 a share in BAC stock, meaning these two contracts could climb an additional 217 percent and 156 percent on intrinsic value respectively based on current options prices.


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

Tags: BACC
3Comments
Aug 26, 2014 2:24PM
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Sorry, no. I wouldn't touch a bank stock. Given the gravity of global to local economics and pollution of all things financial by fake money and corruption... a bank is the last thing you will want to invest in and no, that isn't code... banks blew it with the Gramm Leach Bliley Act then TARP. We will see bank platforms fail and bankers in jail before long... 
Aug 26, 2014 4:50PM
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It's truly amazing how banks have more Phoney assets now then before the Great Recession. Funny what Central Banks massive money Printing can do in the short haul. WE all know how this ends.
Aug 27, 2014 12:02PM
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GDP growth for 2014 has just been revised down to only 1.5%  Wow that is pathetic.

 

This is obamas "recovery" after 5.5 years of his presidency

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