Bank bulls look to Europe
10/04/17

Is a boring bank bucking for a breakout? Some traders seem to think so.

After all, financials have been running strong on both sides of the pond as economic growth rebounds and central bankers stoke interest rates from long-term lows. U.S. lenders like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) both surged more than 50 percent in the last year. Similar statements can be made about European outfits like Banco Santander (NYSE: SAN) and even HSBC (NYSE: HSBC).

Credit Suisse (NYSE: CS) hasn’t been so lucky. It’s barely moved for most of the year and, unlike most peers, remains mired well below its highs from early 2016. But in recent weeks, traders have started to sense a potential change in sentiment:

  • It seems to have started on September 11, when the stock leapt above its 200-day moving average – despite a lack of any obvious catalysts.
  • Société Générale upgraded CS to “buy” the next day, predicting higher dividends and wider profit margins.1 Sacre bleu, cried traders. Is the turnaround suddenly at hand? Shares climb another two percent….
  • The next tidbit appeared on September 18, with management shaking up executive ranks to focus on wealth-management. They’re also shifting attention away from securities as investment-banking goes out of favor.2

CS steadily climbed as the news trickled out, eking out positive closes 16 times in a string of 18 sessions. And just like that, the shares are back to their highest level since January.

Credit Suisse (CS) 5/16/17 - 10/3/17 chart

Source: OptionsHouse by E*TRADE.

Options traders jumped on the bandwagon yesterday, amassing some 12,000 March 17.50 calls for $0.50. Calls fix the price where a security can be bought, so they can make money to the upside but also go worthless if no move occurs.

Tuesday’s contracts will double in value if CS rises 16 percent to $18.50 by expiration in the first quarter of next year. A 19 percent move to $19 would triple their value. Breakeven’s at $18 and they’ll lose all their value if the stock remains below $17.50. 

CS rose 1.33 percent to close at $15.96. Chart watchers may also be fixated on its current price zone, which has held the stock in check following an epic meltdown in late 2015 and early 2016. Those call buyers may be looking for a breakout through that resistance area. 

While buzz in the pits was bullish for CS, the same couldn’t be said for Valeant Pharmaceuticals (NYSE: VRX). It was the target of the session’s largest single transaction: A vertical spread involving 46,000 contracts each in the November 14 and November 11 puts, looking for the debt-laden drug maker to crater more than 20 percent in the next seven weeks.

Bottom line: Yesterday’s options traders bet on CS to rally over the longer-term but saw nearer-term downside in VRX.

 

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1. Reuters: BUZZ-Credit Suisse: rises on SocGen upgrade. 9/12/17.

2. Marketwatch: Credit Suisse overhauls its upper ranks. 9/12/17. Bank of America Merrill Lynch: Going gets tough in 2H17. 9/4/17.