Market Report: Trading Tactics - Financials Hammered: WOW Readers Gained 123%
By Bryan Bottarelli
Today’s weekly strategy discussion follows up on a pick Adam and I made in WaveStrength Options Weekly on June 27, 2007.
As you probably know, the financial sector has been incredibly weak over the last month, as stocks like Bear Stearns Companies (BSC:NYSE), Morgan Stanley (MS:NYSE), and Goldman Sachs (GS:NYSE) have fallen between 20–35% over the last six months.
But while most investors simply watched these financial names take a hit, WOW members received actionable advice that allowed them to witness a triple-digit gain off this move. You see, in late June, our WOW Power Ratings (which track strong and weak market sectors) identified a downside opportunity in shares of Wachovia (WB:NYSE).
Wachovia is characterized as a “bank holding company.” It operates 3,159 offices in 16 states with services that include wealth management, investment banking, checking, savings, life insurance, retirement accounts, credit cards, home equity and mortgage services, insurance, escrow, taxes, private mortgage insurance, education loans, online services, online banking, online bill pay, and online brokerage services.
When Adam and I noticed such a weak reading in the financial sector, we knew that this was more than a momentary event -- and to me -- it presented a wonderful opportunity to establish a new downside put position. So on June 27, I recommended the Wachovia October 55 Puts (WB VK) for $4.70 per contract. What happened next? The chart below tells the whole story:
As of August 8, these puts traded as high as $10.50 per contract, good for a maximum gain of 123.40% off our $4.70 entry price. And don’t forget, these triple-digit gains came at a time when the entire financial sector was getting crushed! Not only did our WOW readers avoid unnecessary losses in the financial sector, but they also hit a triple-digit winner playing the sector’s weakness. According to our latest Power Rating study, the financial sector continues to receive weak signals, so you could expect to see even more downside action to come. Therefore, it continues to be a good idea to add put options on any financial stock receiving a short-term rally.
Bryan
