Banks/Learner – I'm still not loving the sector, it's way overpriced in general. Every one I look at is overpriced. WFC is not too bad if you think they are done screwing people over (or at least getting caught for it). Because of the scandal, they are only trading at 17x earnings and they should benefit as well as any other bank.
- Bank earnings will be ‘mixed’ and ‘messy’ — but there’s some good news
- Wells Fargo Issues Reminder About Feb. 3 Deadline to File Claims in Class-Action Settlement for Retail Sales Practices
- JPMorgan Chase’s Valuations at a Premium on Reforms, Growth
- How Sensitive Is Wells Fargo To Fed Rate Hikes?
That looks impressive but they were $56 in 2016 so little price growth in the past year or so while earnings have shot up (due to scandal). They pay a crappy (2.39%) dividend so I'd go with the options:
- Sell 10 WFC 2020 $55 puts for $4 ($4,000)
- Buy 10 WFC 2020 $55 calls at $14.50 ($14,500)
- Sell 10 WFC 2020 $70 calls for $6.80 ($6,800)
That's net $3,700 on the $15,000 spread so upside potential is $11,300 if they make it to $70 but break-even is $58.70 and you make $1,000 per $1 over that line which means you're starting out $7,000 in the money.
USB is another one that isn't too expensive at $57.18, probably because they also pay a lousy dividend (2.09%) but well over $4/share with low growth, so they are priced about right. I'd stay conservative but also with a spread:
- Sell 10 USB 2020 $50 puts for $3.60 ($3,600)
- Buy 10 USB 2020 $50 calls for $11 ($11,000)
- Sell 10 USB 2020 $60 calls for $5.50 ($5,500)
Here you're in for net $1,900 on the $10,000 spread so $8,100 (426%) upside potential if they nudge up 5% in 2 years – that's a realistic target and the worst case is owning them at $51.90, 10% off the current price.
C is also interesting at $79 as they are making $6 per share now (p/e $15) but that's up from $5.30 last year and on track for $7 next year, which would make them a bit of a bargain. Another one with no dividend (1.63%) so another spread:
- Sell 10 C 2020 $70 puts for $6.60 ($6,600)
- Buy 15 C 2020 $72.50 calls for $15.20 ($22,800)
- Sell 15 C 2020 $85 calls for $9.10 ($13,650)
This one's a little more aggressive at net $2,550 and pays a nice $18,750 for a $16,200 (635%) profit if C moves up 10%. Let's add this one to the LTP and see how it goes.
CM, on the other hand, is still crazy cheap at $98.36 paying a $4.22 dividend (4.28%) but crappy options. Since we REALLY would love to own them in the LTP at $90, I don't mind selling 5 Sept $95 puts for $4.50 ($2,250) just to remind us to watch them.
