Short the Banks

Earning season is over for the Banks. For the most part they’ve beaten estimates and have reached pre-crisis highs. Since the Presidential Election, XLF an ETF Index that tracks the Financial Sector, is up near 22%. The buzz around Wall Street is that President Donald Trump is going to reduce regulations, while the FED increases the Federal Funds Rate. Since the market has priced in the rate hikes and Donald Trump as our President, is there still room to run?

Goldman Sachs has been the most impressive of all the banks, shooting up 40% since the Presidential Election. Goldman Sachs hasn’t seen these levels since 2007, right before the Financial crisis. J.P Morgan, the Country’s largest bank by assets also has had an impressive run of 30% since the Election. Turn on CNBC for an hour and you’re guaranteed to hear somebody recommend the banks as a buy.

Sentiment around the banks has been very bullish, since markets are believed to be cyclical, there could be a pull back coming. There’s little to no volatility in the banks option pricing. The trade would be purely directional, giving a 50% probability of being right. Nobody’s going to sell Goldman Sachs’ shares short, it would tie up too much buying power. The play would be to reduce cost basis by selling call options in the underlying. By selling call options you limit your maximum profit potential, but increase your probability of success.

This isn’t a long term trade, there’s no time limit for this particular trade. From my market awareness, and participation I feel as if people have been too optimistic on Banks and there could be a short term pullback. Personally, the two most attractive trades would be Goldman Sachs, and J.P Morgan. These two have the most premium in their options, and have had the better rallies.

I’m not going to try to predict how much of a pullback we could see, I have no idea. Just as a market participant I’ll know when enough is enough. Just by being around the markets daily, you’ll get your own feeling for the market. There’s no dispute Banks have had an impressive run, maybe it will continue. But, as a contrarian trader I’ll sell you whatever you want to buy, or buy whatever you want to sell. It’s as simple as that, it’s consistent.

By: Spencer Enos