The Clinton-Sanders-Trump Effect on Wall Street
Unusual Options Activity Scanner Shows What Big Traders Are Buying
An Options Trade to Hedge Financials
Criticizing Wall Street and major U.S. companies—especially pharmaceuticals—is very popular these days. For Hillary Clinton to Donald Trump to Bernie Sanders especially, the evils of Wall Street, the major banks and the drug industry are very popular talking point on the campaign trail.
Perhaps in reaction to this negativity, leading bank stocks such as Goldman Sachs (GS) and Bank of America (BAC) are down 14.50% and 20% respectively just this year. And major pharmaceutical companies such as Pfizer (PFE) and Bristol Myers (BMY) are down 7.5% and 7% respectively. Call it the “Bernie Sanders Wall Street Effect.”
And let’s not forget that The Big Short, a movie about the financial crisis, was nominated for an Oscar for Best Picture. Hating Wall Street is fashionable right now.
Here’s a chart of the performance of the S&P 500 (SPY) in red vs. Financials (XLF) in blue and Biotechs (IBB) in green since late December:
While the candidates’ anti-Wall Street rhetoric is surely not helping financial stocks, I’ve been highlighting four other potential reasons for the sector weakness to my subscribers of Cabot Options Trader and Cabot Options Trader Pro.
Here are my theories on the causes of the pressure on financial stocks:
1. The Federal Reserve is unlikely to raise interest rates at nearly the rate expected by many investors this year. A rising rate environment is assumed to be a positive for the banks, and the expectation of four rate hikes in 2016 has now been lowered to one or two, if any at all.
2. The banks may have exposure to the oil and commodity companies that are taking pain. This would explain the strong correlation between oil and bank stock movements in the last several months.
3. There is growing concern about a U.S. recession.
4. Rumors of counter party risk to European banks have been circulating, with Deutsche Bank (DB) the biggest potential issue.
Regardless of the reason, whether it’s political or one of my Bernie Sanders Wall Street theory, financial stocks have been a mess this year. This can be a perfect environment for options trading because with options, you can make money no matter which direction the market is heading.
So how might an investor use options to put on a bullish or bearish position in the financials?
My Unusual Options Activity Scanner has recently picked up on bullish positions in Charles Schwab (SCHW). Like most financial stocks, SCHW has struggled this year and is down 18% for the year. However, if the economy improves and interest rates rise, SCHW is expected to be a big beneficiary.
Unusual options activity can provide an inside look at what the big traders expect—an enormous advantage for individual options traders.
Here are two unusual SCHW options trades from Friday, February 26 and Monday, February 29:
Buyer of 4,000 Charles Schwab (SCHW) June 28 Calls for $1.10
Buyer of 12,000 Charles Schwab (SCHW) September 28 Calls for $1.85
These trades seem like decent risk/reward opportunities. However, I would like to see a couple more days of stability in the financials before getting involved on the bull side in a financial stock.
On the bearish side, subscribers of Cabot Options Trader and Cabot Options Trader Pro are currently short the financials via puts on the Financial ETF (XLF). Here’s my February 17 buy alert on the trade:
Hedge: Buy the Financials ETF (XLF) June 20 Puts (exp. 6/17) for $0.95 or less.
The S&P has rebounded approximately 110 points in the last four trading days. This is either classic bear market action or the start of a big move higher. Regardless, I feel that the risk/reward is favorable to add a hedge to the portfolio.
To execute this order, you need to:
Buy to Open the XLF June 20 Puts.
The most you can lose on this trade is the premium paid, or $95 per put purchased.
As is always the case when we execute a hedge, we are "ok" losing on the position because it provides protection for our bullish positions. Also, by adding this position, it gives us the confidence to add another bullish position should the market continue to move higher.
By no means am I calling a near-term market top. This recent run could easily continue for another couple of days or weeks. Rather, I am targeting an important market sector that has been under intense selling pressure until the recent four-day run. And paying $0.95 seems like a great risk/reward should the market fall apart again.
Who knows how long the Bernie Sanders Wall Street Effect (and Donald Trump Effect and Hillary Clinton Effect) will last. Without a doubt, the next several months are going to be interesting as we watch the U.S. presidential election. And if you have conviction on who will get elected and how that will impact certain sectors of the market, options give you an inexpensive way to gain exposure in a bullish or bearish position.
Click here to find out how options can help you boost your portfolio.
Your guide to successful options trading,
Chief Analyst, Cabot Options Trader and Cabot Options Trader Pro