Are Banks Stocks a Buy – Yes

At these current levels bank shares are most definitely a buy.  It is the second week of February 2010.  The Dow sits just above 10,000, we are currently in a market correction which has already pulled back 7% from the recent highs.  The charts of Goldman Sachs (GS), JP Morgan (JPM) and Morgan Stanley (MS) from a technical point all look bad.  However, one can not rely on technicals alone, and even a banker can make money with these steep yield curves.  

I am looking to the options market for direction.  Volatility is still very low in the bank stocks.  Even with Goldman Sachs trading down to $153 from a recent high of $195 the volatility remains at 30%.  The low volatility and therefore low cost of insurance on these stocks makes them very attractive.  Don’t be afraid to use options to protect or even enhance you positions.

I am not a raging bull on either the market or the banking sector at this time, but I do feel it is safe to step in at these levels.  I am currently buying bank shares and coupling lose positions with option collars.  Although I feel that we have settled into a trading range, I still want some downside protection.  For example, in Goldman Sachs, which I purchased for $150.82, with the stock trading at $153 I am selling the March $160 call for $3.80 and buying the $140 put for $2.75.  I am looking for (GS) to trade in the $150 to $160 range over the next few weeks.  With this strategy I only participate in upside profit to $160 and I am protected to the downside below $140.  As with any trade this one may need some adjusting and I will evaluate it everyday.  

If you are reading this article in order to establish a long term position in the market, and you are not an active trader, I suggest you rethink your current investing strategy.  You can no longer count on the buy and hold method of old, nor should you have to.  If you can not actively trade in the market, find someone who will do it for you.  

The information in this article is not intended as trading advise.  Before making any trades please contact your financial advisor.