Longer Term Interest Rates Rising Is Positive For Banks

Selling put options is a great way to generate income and solid annualized returns by taking less risk than owning the same amount of common stock long. When I look for these trades I target earning 2% or more for every 30 days of expiration time.

Selling a put option is a strategy where you are slightly bullish on a stock and this reduces your risk by being able to name the price (called the strike price) you are willing to pay for the company. This contract is valid for a specific amount of time called the expiration date.

These terms are set by you and for agreeing you are paid upfront for the potential obligation to buy 100 shares of stock for every put sold. I typically look at options expiration dates between two weeks and two months.

Financial Stocks are top performances over the past 3 months.

They are up 25% to be exact. Everything from Credit Card companies (AXP, V, MA) to banks (JPM) and Insurance companies (BRK-B) has been benefiting from this strong trend.

Particularly strong performance is coming from Regional Banks (small to mid-sized more local institutions) as seen in SPDR S&P Regional Banking Fund (KRE).

This index fund has been riding the 50 day moving average and has formed a nice consolidating base. With a strong trend up it is a good time have bullish exposure (of which I prefer to sell put options for income and attractive annualized returns even if KRE continues to go no where in the weeks ahead).

Trade details:

Sell to Open June 18 $69 puts on KRE for $1.53 using a limit order. You are paid 2.2% upfront on your purchase obligation of $6900 per option sold (100 shares * $69) and you agree to buy shares at 3% discount to Friday's closing price.

At expiration if shares are above $69: You keep $1.53 for a 25.3% annualized return. Now take your capital and find another profitable trade.

At expiration is shares are below $69: You buy 100 shares of stock for every put sold at 5% discount to Friday's closing price based on your adjusted cost basis ($69 - $1.53 = $67.47). Now you can sell covered calls for more income.

Use a 25% stop loss on your cost basis at $50.60. Shares will be below all recent supports and below the 200 day moving average.

Financials are strong today... I suggest you trade them for income.

Divider provided by barge

Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.

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