Look out tech, banks have made a big move
06/30/17

Is tech money moving to banks?

Until recently, mega-cap champions of the new economy could do no wrong: Apple (NASDAQ: AAPL) rode a wave of iPhone upgrades. Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOGL) cemented their hold on digital advertising. Tesla (NASDAQ: TSLA) left carbon-belching carmakers in the dust. And, Amazon.com (NASDAQ: AMZN) was on its way to global dominance.

Then came June 9. The group inched to new highs early, only to hit a wave of selling. By the time the dust settled, two weeks of gains were gone, and the hash-tag #techwrech lit up social media. 

Yesterday the sector was setting up for only its second losing month in a year, while money flocked to banks and financials. Options traders looked for that trend to continue, setting their sights on industry heavyweight JPMorgan Chase (NYSE: JPM).

Going to work barely an hour after the open, buyers snapped up 15,000 October 95 calls for $2.14. They also sold an equal number of October 100 calls for $0.86, resulting in a net cost of $1.28. Known as a vertical spread, the strategy is tailor-made to profit from the House of Morgan reaching triple digits by autumn. Here’s how it works:

  • Owning calls fix the price where a security can be bought. In this case, they’d get long JPM for $95 if it runs through that level.
  • Selling calls will force them to deliver shares if a certain point is reached. This time it’s $100.
  • Selling calls also generates income that lowers their cost. Lower cost means potentially more leverage.
  • They’ll almost quadruple their money if JPM rallies 10 percent by expiration. Breakeven is at $96.28, and the position will become worthless if the stock remains below $95.
JPMorgan (JPM) and Apple (AAPL) chart comparison.

Source: OptionsHouse by E*TRADE. Ovals indicate June 9 session.

JPM rose 1.33 percent to $91.15 yesterday amid news the company had passed regulatory “stress tests” with flying colors. That had investors licking their chops for higher dividends and more generous stock buybacks.1

Bank of America (NYSE: BAC) also drew some bullish activity, with over 35,000 30-June 25 calls purchased for $0.04 to $0.06. For traders, those look like inexpensive flyers in hope of a rally into quarter-end today.  

Adding insult to tech’s injury, BAC traded over 840,000 options contracts yesterday – almost twice the volume of AAPL. It was the third straight session that the red-white-and-blue lender outpaced the smart-phone giant. Traders haven’t seen that in a while.

Bottom line: Sector leadership has been shifting this month, and now some investors are banking on more upside in some key financial stocks.

 

Click here to log on to your account or learn more about E*TRADE's trading platforms.


1. CNBC: Bank stocks jump after banks get Fed's blessing to unleash big buybacks, dividends. 6/29/17.