Options On Recovery: Betting On Bank Stocks

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

Investors looking for exposure to bank stocks 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 due to the implied volatility embedded in the options.


We are in 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. Chairman Bernanke has pledged to keep rates low well into 2014.

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

Bank of America Corporation (NYSE:BAC)

Total Assets: $2,180,055,682

Price to Book Value: 0.6x

Dividend Yield: 0.5%

JPMorgan Chase & Co. (NYSE:JPM)

Total Assets: $2,320,330,000

Price to Book Value: 1.0x

Dividend Yield: 3.6%

Wells Fargo & Company (NYSE:WFC)

Total Assets: $ 1,333,799,000

Price to Book Value: 1.6x

Dividend Yield: 3.2%

Citigroup, Inc. (NYSE:C)

Total Assets: $1,944,423,000

Price to Book Value: 0.5x

Dividend Yield: 0.1%

Options Strategy:

Investors can sell out-of-the-money put options on the largest U.S. banks. Investor can earn between 10.8% and 14.2% 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.