TP Says...
Tuesday, June 30, 2020

OK, so the banks have dropped this month along with the broader market. Last week’s hit by the Fed didn’t help, but XLF, the ETF that tracks banks and financial stocks, has slightly outperformed the S&P 500 recently.   Why?  Well, it could be that even though the banks complain about their risk exposure to a resurgence of COVID-19, people can still use banks, and banks can still charge them money.  After all, they can just siphon off fees from client accounts.  And the Fed’s risk assessment that said banks weren’t as prepared as they should be for a big economic downturn, could already be baked into their prices at this point.  Plus, the Fed is now buying more corporate bonds, which creates all sorts of potential problems, but is an indication that our tax dollars could help keep the banks from collapsing, and thus provide a floor for their stocks.  That’s why a contrarian might be bullish on XLF.  XLF’s IV is still high enough to make its options interesting short premium candidates.  So, if you are considering a bullish trade, the short 20 put in the Aug weekly expiration with 38 DTE is a bullish strategy that has an 86% prob of making 50% of its max profit before expiry and that generates $1.16 of positive daily theta.  That gives it a relatively high .54% daily theta return on capital.

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