Investment Bank Stocks: Will Goldman Sachs’ Good News Prolong The Banks’ Upswing?
Tuesday, April 14, 2009
by Karim Rahemtulla, Investment Director, Smart Profits Report
This morning, Goldman Sachs (NYSE: GS) raised $5 billion by selling shares in its company for $123 each.
The firm was the sole underwriter, meaning that it placed the shares on the market without the help of any other investment bank (oh, wait… are there any other investment banks left?)
Goldman helped its cause by pre-announcing a very good quarter - much better than analysts estimated. This follows Wells Fargo’s (NYSE: WFC) better-than-expected earnings news last week.
So has the Goldman offering signaled a near-term top for financial stocks? Or is it signaling a new bull market?
Often times a major event like this marks an important point in the market: Investors are back in the game and placing their bets…
Cashing In On Investment Bank Stocks? You Bet…
That’s why the major investment bank stocks have doubled, tripled, or even quadrupled in price since their lows. But it’s important to see the trend - and play it - before it happens.
My 400 Report readers have cashed in twice on this over the past few weeks. First, we bagged a 67% win on Citigroup (NYSE: C) in just one week in early March. And yesterday, we cashed out on US Bancorp (NYSE: USB) for a gain of more than 20% in just two days.
And in my other trading service - Strategic Income - we’ve taken advantage of this bank run in a less conventional way…
Selling Call Options Against Wells Fargo & JP Morgan
Because of the ongoing intense volatility in the financial sector, we’ve sold call options against our two major financial positions - Wells Fargo and JP Morgan (NYSE: JPM) - for several months now.
When you sell a call option against your shares, you can pick up healthy option premiums, which lower your cost (thus giving you valuable downside protection) and increase your upside. And in a volatile market, those premiums are fatter.
And it gets better. You can reverse a covered call sell at opportune times - meaning you buy back the option when the shares decline, then resell new options on the way up. The only caveat is to make sure you own a company that will be around to go up and down!
Later this week, I’ll be issuing a new covered call trade in the new Xcelerated Profits Report issue. To become a member and receive this trade, you can sign up here. It should put about $1,000 in your pocket (based on a 1,000 share trade) - not bad for a $49 newsletter.
Investment Bank Stocks: Employing A Profitable Combination Strategy
So how else can you profit from investment bank stocks?
While Goldman’s news does bode well for the financial sector, it certainly doesn’t mean that volatility has gone away, or that the financial sector is in the clear. So if you want to take advantage of the ups and downs in the sector then you need to employ a combination strategy.
For companies you really want to own, use a covered call strategy or sell put options.
In my personal trading account, I’ve been taking advantage of volatility by using both of these.
When I want to own a stock at a lower price than current levels, I sell a put option. This obligates me to buy the shares at even lower levels. It’s an excellent strategy to use when a quality company gets beaten down, largely based on “herd mentality” selling.
If the shares don’t close below my chosen level (the strike price), then I still get to keep the money that I received from selling the put.
If the shares close below my strike, I either have to reverse the trade or I am obligated to buy the shares at that strike price. But this is the goal all along. Again, the caveat is to do this with high quality companies.
For more information on this strategy, check out the put-sell column that my colleague Lee Lowell wrote a few weeks ago. He’s an expert at it and does this type of trading for his Instant Money Trader readers all the time. Since he started the service last autumn, he hasn’t lost on a trade yet.
This success hasn’t gone unnoticed. One of our major competitors - the biggest in the business, in fact - is actually using Lee’s success to try and sell their product. We can see why. It’s less expensive to buy Lee’s and his track record is better, too!
So which companies should you play?
Investment Bank Stocks - Play Either Side With LEAPs
If you want to take a chance on the long side or short side with investment bank stocks, buy LEAP options. LEAPS allow you to participate in the stock’s move, while leaving 80% or more of your cash off the table and for use elsewhere.
You can read more about LEAP options here.
As for which financial sector companies you should consider for covered call selling or put-selling… Wells Fargo, US Bancorp, and JP Morgan are all good candidates.
For LEAPS, look at Bank of America (NYSE: BAC) and Citigroup.
That’s all for today.
Karim Rahemtulla
P.S. If you’d like to get a first-hand tutorial on how the covered call, put-selling, and LEAPS strategies work, Lee and I will be discussing them at the upcoming “Boom & Doom” conference at the fabulous Turnberry Resort near Miami in June.
Our Senior Analyst and healthcare specialist Marc Lichtenfeld will also join us, plus Oxford Club Associate Investment Director and White Cap Report chief strategist, Louis Basenese, and Money Map Press Investment Director, Keith Fitz-Gerald.
It would be great to meet you in person. The rates at the resort are fantastic - and we have an early-bird special on top of that, which expires tomorrow, so be sure to check out the conference here.
Related Articles:
The Good Bank/Bad Bank And The Ugly
Kiss Goodbye To “Ordinary” Investing: Why Smart Investors Use Covered Calls
Ticker Of The Week: Financial Select Sector SPDR (NYSE: XLF)
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