Editor's Note

All the major banks with the exception of Goldman Sachs report earnings this week. Goldman reports the following Tuesday. While we do not know what they will report the overall perception is for lowered earnings. We are going to try and capitalize on that move.


No New Bullish Plays


XLF - Banking ETF - ETF Profile

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slow and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Buy May $23 call, currently 16 cents, no stop loss.
Buy May $22 put, currently 50 cents, no stop loss.
Net debit 66 cents.