Options Plays On 'Too Big To Fail' Banks

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 |  Includes: BAC, C, JPM, WFC
by: Bear Fight

Bank stocks have experienced a strong run in 2012 and have outperformed the broader market, as measured by the S&P 500 (NYSEARCA:SPY). Investors looking for exposure to bank stocks, but wry about the run up in prices, should pursue an often overlooked option strategy. Investors can get paid handsomely for selling out-of-the-money put options on large capitalization bank stocks.

We are entering year four of the post-credit crisis world. The Federal Reserve and the administration have done everything they can to keep the mega capitalization banks alive due to their role in the real economy.

Bears say that U.S. banks are zombies and will be weighed down by more regulation. But the interesting part of the put option strategy is that investors are simply betting on the survivability of these equities, not the return to prosperity. Outlined below are the four largest U.S. banks by assets. The sheer size of these institutions makes them important to the overall banking system -- too big to fail.

Largest U.S. Banks
Click to enlarge

Bank of America Corporation (NYSE:BAC)

Total Assets: $ 2,264,909.0

Price to Book Value: 0.6x

JPMorgan Chase & Co. (NYSE:JPM)

Total Assets: $ 2,265,792.0

Price to Book Value: 1.2x

Wells Fargo & Company (NYSE:WFC)

Total Assets: $ 1,313,867.0

Price to Book Value: 1.6x

Citigroup, Inc. (NYSE:C)

Total Assets: $ 1,874,908.0

Price to Book Value: 0.7x

Company

Recent Price

YTD Change in Price

JPMorgan Chase

$38.07

8.83%

Bank of America

$7.95

37.07%

Wells Fargo

$30.59

7.60%

Citigroup

$32.36

14.23%

SPDR S&P500

$136.03

6.70%

SPDR S&P Bank ETF

$21.91

7.98%

Click to enlarge

Options Strategy:

Investors can sell out-of-the-money put options on the largest U.S. banks. Investor can earn annualized yields of greater than 7% on selling cash secured put options with significant margin of safety.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.