Everyone is always interested in investing in the best sectors at the right time in the market. This is not always easy to do. No one knows for sure exactly what is going to happen. However, we can do our homework and find out what sectors and stocks have the best chances of doing better going forward. In this post, we discuss exactly why we think now may be the right time to buy LEAPS options in the financials.
We also discuss:
- How different sectors are positioned for 2023
- We look at 3 of the Top Bank Stocks to determine which one is best
- We discuss what a LEAPS option is and why it is better than buying stock outright
- Finally, we show how to place the trade and BUY the LEAPS option in the best bank stock on the trade platform.
Please check out and download the FREE options Workshop. It talks about the two main reasons why options can be less risky and more profitable than just buying stocks alone. It goes into some detail about how being able to profit in both directions as well as being able to pick your win percentage gives you a huge advantage over just buying stocks alone. Especially in this market with swings up and down and high volatility. That is good for option traders as we can collect more premium!
DISCLAIMER: I am not a financial planner and I am not recommending trades. Please do your own research and talk with your Financial Planner when making trades.
If you are new or learning options, I recommend you start small and always continue to invest in your 401K, IRA or separate savings conservatively. I look at my options trading account separately as a business in itself.
Alright guys,
What Sectors are Positioned to do well in 2023?
Let’s look at the Factset earnings Insight for the week and the overall market. You can see here that the
Earnings Growth: For Q4 2022 is expected to decline for the S&P 500 at -5.0%.
Now you can also see that the earnings outlook for the first half of 2023, so the next 6 months, is pretty bleak as well with earnings declines of -3% and -2.4% for Q1 and Q2.
It’s not until the second half of 2023 when we start to rebound and have positive earnings growth.
The current forward PE of the S&P is 17.8 which is above the 10 yr average of 17.2. So stocks are not necessarily cheap right now.
We still have a lot of companies set to report. Earnings may be disappointing which can bring that PE down and be a good time to trading and invest long to the upside.
So what can we do now? Well there are individual sectors that should still do well in this market.
Let’s take a look at the Q1 23 expected Earnings Growth from Factset. As you can see Consumer Discretionary, Industrials, Energy and Financials are all expected to have positive earnings growth.
If we look at the Revenue growth, Financials is expecting to see the largest Revenue Growth. This is due to the higher interest rates that they are collecting on loans.
So that is Q1 23, however stock prices often move upon investor sentiment and in advance of the actual numbers occurring or being reported. So I like to look further out so we can see where the sectors are expected to be heading over the full year ahead.
Now if we look at the whole 2023 Calendar Year, we see that the Financials and Consumer discretionaries are still expected to outperform the market as a whole by a lot. The S&P is only expected to have Earnings Growth of about 3% vs 13.5% for the Financials and 30% for Consumer Discretionaries.
So now we’ve looked out for the quarter and year ahead at the expected earnings and revenue growth.
But let’s look at where the sectors are today price wise. So here is a chart of the PE Ratio which is the Price to Earnings of the different sectors.
We see that the PE of the Consumer Discretionaries is the highest. And the PEs of the Financials is one of the lowest at just 13.
Is Now A Good Time To Invest In Banks?
Banks are a great place to invest in strong economies. When consumers are spending and unemployment is low. This is when profits tend to grow and loan defaults are typically kept in check. On the other hand, banks tend to perform quite poorly during recessions and other uncertain times. So banks are a cyclical business.
There are a couple of reasons why banks tend to perform poorly during recessions and other difficult economic climates. For one thing, they can face a wave of loan defaults if unemployment rises. Also, consumers pump the brakes on spending during recessions, which leads to lower demand for loans. I think we are past that risk now.
So since the S&P Earnings Growth is expected to turn positive in the second half of this year we should consider getting out in front of it while the stock prices are still low.
So YES, I think now is a good time to invest in the bank stocks! Do you think the same? Let me know in the comments below!
What Are 3 Top Bank Stocks To Consider Investing In Now?
So let’s take a look and compare 3 of the Top Banks Stocks in Bank of America (BAC), Wells Fargo (WFC) and JP Morgan Chase (JPM). We will look at the Fundamentals, the Technicals or price charts, latest earnings reports and news. We will also look at the options in each and determine how to best play them in this market going forward this year.
Bank of America (BAC)
So let’s start by going to the summary page of Bank of America Ticker BAC on Yahoo Finance. We are going to look at some key fundamental factors. We have a PE Ratio Price to Earnings of 11 which is very good. It’s under the historical 13 PE for Financials. It has a good dividend at 2.48% so people will invest in it for that alone. We don’t receive it with options but it’s built into the option price.
The current price is 35 and the 52 week high is 50 so there is still a lot of room to move to get back to that price.
Now if we switch on the statistics tab on Yahoo Finance, we want to look at some other parameters.
We look at the Price to Book which is 1.15 and anywhere in the 1 range is good. Price to Sales of 3 is typical. 30% Profit Margin is very good. YOY Quarterly Revenue growth of 4% and and Earnings per share growth is positive as well at 1.7%. Return on Assets is how a bank makes money and 1% or better is good. Bank of America is close at .88 and Return on Shareholder Equity is good at 10% right where we like to see it.
The cash position versus debt is good at almost double the debt in cash. So they will be able to survive any downturn and do well long term.
Alright you get the picture of what to look at and where to grab these numbers on Yahoo Finance.
So, I’m not going to go through this on Wells Fargo and JPM but I’ll just let you know the numbers.
In looking at the numbers we can see that Wells has the highest PE at 14.7 so it’s not the cheapest.
Wells Fargo
It also has a bit of risk. In December, Wells Fargo (WFC) agreed to a $3.7 billion settlement with the federal Consumer Financial Protection Bureau (CFPB) for widespread violations in the way it managed auto and mortgage loans.
You can see where it hit its 4th Quarter numbers with negative revenue and earnings growth.
Wells has put a lot of big things behind them. So that will change going forward with time. The biggest limitation on Wells Fargo is still the asset cap because it essentially prevents it from building up its balance sheet, which is a key way banks make more money.
Wells could be a little more risky but it still has a very big upside.
JPMorgan Chase is one of the most profitable of the big universal banks. The bank has operations in just about every area of both commercial and investment banking, and it has done a particularly good job of expanding its credit card and auto loan businesses in recent years.
JPMorgan Chase has also done an excellent job of embracing new technologies, and it has made some key investments in financial technology (fintech) companies.
The consumer banking operation is one of the largest in the U.S., it is worth noting that JPMorgan Chase has a large investment banking operation. This can be a positive catalyst in turbulent economies since activities such as trading tend to perform strongly in volatile markets.
You can see though that it is a high priced stock at $140 and is at 88% of its 52 week high.
Bank Of America
So Bank of America is my favorite of the 3. It has made major improvements in efficiency while building out its online and mobile technology.
Bank of America is in a strong position to benefit from rising interest rates. It has a combination of an excellent retail banking operation and an investment bank that can benefit from market volatility.
It is a great overall bank with a low price, solid fundamentals and great upside so it’s my number one Bank that I’m investing in now.
So let’s look at buying a LEAPS option in Bank of America.
What is a LEAPS Option?
LEAPS options are long-term options that have an expiration date that is further out than traditional options. The name “LEAPS” stands for “Long-Term Equity Anticipation Securities.”
So the S in LEAPS is not plural. The S stands for Securities!
LEAPS options were created to give investors the ability to trade options within a longer time frame.
A LEAPS option is a bullish, defined risk strategy that profits from a stock moving up in price through the expiration of the options.
It is accomplished through buying a Deep in The Money CALL Option with an expiration date 1-2 years out in time.
LEAPS options are one of the few strategies that we use where we are buying options and paying the debit instead of collecting premiums which is what we normally like to do.
BUY A LEAPS In BAC
We are going to BUY a Deep In The Money CALL in BAC Bank of America on the TastyWorks Trade platform.
So we are going to go to the Trade Tab and punch in the ticker BAC in the upper left.
We want to pick the expiration date in the regular option chain that is more than a year and closer to 1 1/2 or even 2 years to Expiration.
So in this case, we pick the Jan 25 option chain with 719 days to expiration. We will look to BUY a Deep In The Money CALL Option.
We go Deep In the Money to bring the cost of the option down. With the Current Stock Price at 35.45, we BUY the 20 Strike option for 16.65. Think about it. There is already 15.45 intrinsic value built into the option. The current 35.45 stock price – 20 = 15.45.
Since we are paying 16.65 it is really like buying the option for 16.65 – 15.45 = 1.20.
We click on the Ask to BUY the 20 CALL option.
We switch to the curve mode by hitting Curve in the trade tab. It is a little more visual and you can see the profit zone in green.
So, we are BUYING the 20 LEAPS option with 719 DTE Days to Expiration. This doesn’t mean we need to hold the option that long. We can sell the option whenever we want prior to that date.
Because we are going Deep In the Money, the LEAPS option value will closely replicate the P&L (Profit and Loss) of owning 100 shares of the stock outright. We continue to make more money as the stock moves up in price.
From here we hit review and send and to check and make sure everything is correct as it should be. Then we hit send order to place the LEAPS option trade.
Now let’s take a closer look at some of the parameters and break down what we are doing.
Setup:
– BUY the Deep In the Money Call Option ~ 1 ½ – 2 Years out (DTE)
Directional Assumption: Bullish
As long as the price moves up we continue to make money just like we own the 100 shares of stock.
Ideal Implied Volatility Environment: Low
We pay less for the option when IV is low. As you can see the IVR of BAC is 1 which is about as low as it can be. So we pay less for the option so it is a great time to BUY LEAPS.
Max Profit: The maximum profit potential for a LEAPS option is infinite. The stock price can move up infinitely.
BP Effect and Max Loss
We can see in the lower right the Buying Power Effect. This is the amount of capital that is required to place the trade. Or in other words, it is how much capital the trade is utilizing.
Since we are BUYING the LEAPS option, the amount we paid is the Max Loss and it is also the amount of Buying Power required to place the trade. It is a defined risk trade.
This is the beauty of the LEAPS Option over buying the 100 shares of stock outright. The cost to BUY 100 shares of BAC at the price of 35.45 will be $3545. So, the $1665 is less than ½ the cost to control the same 100 shares.
If the stock did move against us down that is max loss. So we would lose much less than if we owned the 100 shares outright.
Key Takeaways
The LEAPS option is a cost-efficient way of investing. We are able to control the same number of shares for less than ½ the cost while limiting our downside risks.
At the same time our upside is uncapped!
Now is a great time to consider buying a LEAPS option in Bank of America.