While the overall market has struggled over the past few weeks, bank stocks in particular have been notably weak. The Financial Select Sector SPDR Fund (NYSEARCA:XLF), which is made up of all the big banks, had fallen for 13 straight days until finally finding some footing on Thursday and Friday.
Much of the rally over the past several days in bank shares was due to Federal Reserve approving plans for most major banks to increase dividends and also share buy backs as well after passing the so called “stress tests.” This should provide well needed downside support for most big banks and especially for two of the biggest banks in particular, JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C).
J.P. Morgan (JPM)
The company announced it would increase its dividend to 80 cents a share from 56 cents a share and also buy back up to $20.7 billion in stock. This will certainly make JPM more attractive on a yield basis (now over 3% with the dividend increase) and help to dampen downside volatility with the increased buy back.
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Technically, JPM stock reached its most oversold reading over the past year on a 14-day RSI basis before bouncing. Previous instances when shares were this oversold proved to mark significant intermediate-term lows in the stock. $103.75 is major long-term support which once again held.
After reaching recent highs, implied volatility (IV) softened slightly but is still at levels that favors option selling strategies. So to position bullishly in JPM stock, a bull put spread makes probabilistic sense.
JPM Stock Trade Idea
Buy JPM July $97 puts and sell JPM July $100 puts for a 50-cent net credit.
Maximum gain on the trade is $50 per spread with maximum risk of $250 per spread. Return on risk is 20%. The short $100 strike price is positioned well below $103.75 support and provides a 4.03% downside cushion to the $104.20 closing price of JPM stock.
Similar to JPM, Citigroup announced it would increase its dividend to 45 cents per shares (2.67% yield now) and buy back $17.6 billion shares of stock. This 40% dividend increase will likely attract value investors and the stock buyback will add another layer of downside support to C stock.
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In my previous post on C stock from May 30, I looked for Citigroup to bounce from an oversold condition, which proved to be the case. Now that shares have once again returned to nearly identical levels, I once gain expect another bounce. The $66 support level once again proved formidable and MACD just issued a buy signal.
Implied volatility (IV) in C options mirrors that of JPM. IV is just off the recent highs and still at attractive levels for short volatility trade structuring. Once again, this favors a bull put spread as the preferred way to take a guardedly bullish stance.
C Stock Trade Idea
Buy C July $62.50 puts and sell C July $64.50 puts for a 35-cent net credit.
Maximum gain on the trade is $35 per spread with maximum risk of $165 per spread. Return on risk is 21.21%. The short $64.50 strike price is positioned well below $66 support and provides a 3.61% downside cushion to the $66.92 closing price of C stock.
It is important to also note that increased dividends make put prices comparatively more expensive, another benefit to selling put spreads on higher-yielding stocks like JPM and C.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.
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