Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Investing in banks
Peter Siks
Summary: In this article, you will read about the attractiveness of European banks at their current levels, given the appealing dividend and share buyback programmes that support the share price. The strategy described will be using both stocks and options.
This can in no way be regarded as a recommendation to make the described transaction. It is merely an educational article about potential trade set ups whereby dividend yield, share buybacks, and options are combined.
Investing in banks
There are large groups of investors who do not invest in banks due to their complexity, reliance on interest rates for profitability, increased regulatory pressure, dependence on national/European political decisions, and economic circumstances in general.
On the other hand, there are investors who are willing to accept the risks that come into play when investing in banks. And at this moment in time, there are opportunities for those investors.
The trade set up
The idea about this trade/investment is fairly simple: to be long the stock and short the option premium. This set up only works for a neutral to slightly bullish view on banks. If you think that bank stock prices will fall, this article is not meant for you. This set up is also not applicable if you believe bank stocks will go up by 20% or more.
The setup: You buy half the number of stocks you want and at the same time sell a strangle (or straddle) option set to expire on the third Friday of December this year. This will be illustrated in the example below.
By selling the strangle, you enter into an obligation: either to deliver the shares at the strike price (the call) or to buy the shares at the strike price (the put). This last potential obligation is the reason why you only buy half of the number of stocks you want.
European financials
Below, you will find a screenshot of a number of shares that meet certain criteria. The available Saxo Screener is used to narrow the available universe down to come to this list. Some of the filters:
- Dividend yield > 5%
- Market cap minimum 10 billion
- Currency is EUR
- The sector is financials (that is why you also see some insurers)
You see that a number of financials meet the criteria and it shows the power of the screener. As an example, BNP is used in the trade set up.
- Step 1: Buy 100 shares
- Step 2: Sell the strangle that expires in December 2024
Shares are currently trading at € 53.96
The 50 – 55 strangle (the 50 put and the 55 call € 6.56 -
Investment (before transaction costs) € 4,740 (€ 4.74 per share is multiplied by 100)
Scenarios
The possible scenario’s of this position at the 20th of December 2024.
The stock is above EUR 55
You will have to deliver the shares at, so you receive 5,500
Initial investment 4,740 –
Profit 760
Dividend received 7,23% (= EUR 3.90 per share) 390 +
Total profit including dividend 1,150
Stock is trading unchanged at EUR 53.96
You do not have to deliver the shares, so you can sell them for 5,396
Initial investment 4,740 –
Profit 656
Dividend received of EUR 3.90 per share) 390 +
Total profit including dividend 1,046
Stock is trading lower at EUR 48
You have to buy an extra 100 shares at EUR 50, due to the put. This brings your total holding to 200 shares at an average price of (EUR 47.40 + EUR 50)/2 = EUR 48.70.
The stock is currently trading at 48
You make a loss on the shares of 200 * 0.70 = 140
You did receive a dividend during 2024 390 -
That gives a profit of this set up of 250
Break even
You are long 200 shares at an average price of € 48.70.
The stock is currently trading at € 46.75
You make a loss on the shares of 200 * € 1.95 = € 390
You did receive a dividend during 2024 of € 390 and that offsets the loss in the shares. This means that you have a downside buffer of € 53.96 - € 46.75 = € 7.21 (13.3%).
One exception
If you would set up the trade like described above, there is a small chance that you will be assigned on the short call option. If this is done before the dividend, you will not get the dividend. But this is not a bad scenario because your initial investment of €4,740 will be sold at €5,500. The only thing you miss is the dividend.
Wrap up
If you want to set up a position that does not ask much monitoring or adjusting, financials might be an interesting corner of the market to consider. Nevertheless, the risk is on the downside, and only consider a set up like this if you have a neutral to (slightly) bullish view on European financials.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer