By Adam Lass
In Taipan Publishing Group's Banking Crisis Web Summit, Justice Litle and I took you down the long path of incompetence and deceit that has Lead the American banking sector to its greatest losses since the Great Depression, both in terms of real value and the trust that it has squandered.
The FDIC has a secret list of 117 banks that are in deep trouble... and 15-20 banks on that list may fail at any moment.
In the summit I showed you a series of critical steps you must take to defend yourself against the loss of both your savings and investment capital.
For example, make sure that your files and identity papers are up-to-date. And there are several institutions that may see further losses, if not out-and-out bankruptcy. If you have those three "poison banks" we discussed in the summit in your portfolio, consider getting rid of them immediately.
But even with all this bad news, there is a way to protect yourself -- and even post investment gains -- regardless of which bank fails next. That's with a specific method of option trading. Let me give you the details on how you can execute this special tactic.
To begin with, you should be aware that Standard and Poors maintains an exchange-traded fund (ETF) against the major players of the financial sector known as the Financial Select SPDR (XLF:AMEX).
Here are the XLF’s top 20 components by weight:
JPMorgan Chase & Co. (JPM) 11.25%
Bank of America Corp. (BAC) 8.42%
Wells Fargo & Co. (WFC) 7.87%
Citigroup Inc. (C) 6.41%
U.S. Bancorp (USB) 4.30%
Goldman Sachs Group Inc. (GS) 3.88%
American Express Co. (AXP) 2.54%
Merrill Lynch & Co. Inc. (MER) 2.14%
CME Group Inc. Cl A (CME) 2.06%
Bank of New York Mellon Corp. (BK) 2.02%
MetLife Inc. (MET) 1.97%
PNC Financial Services Group Inc. (PNC) 1.87%
AFLAC Inc. (AFL) 1.73%
Travelers Cos. Inc. (TRV) 1.61%
Allstate Corp. (ALL) 1.60%
Prudential Financial Inc. (PRU) 1.54%
Morgan Stanley (MS) 1.52%
BB&T Corp. (BBT) 1.45%
Charles Schwab Corp. (SCHW) 1.41%
State Street Corp. (STT) 1.34%
As we have seen over the past few days, the trillion dollars Congress has pledged may very well not be enough to successfully defend these companies.
Should any of these heavy hitters, or indeed virtually any of the surviving 84 banks, insurance companies and trading house on the list take on water and sink, the entire index will reflect that loss immediately. And the additional loss of faith in the sector will magnify that loss.
If you look to the Chicago trading floor, you see that there is a robust business trading puts and calls against this ETF. Here is how to take advantage of that liquidity...
As I sit to write to you, shares of the XLF are trading in the vicinity of $16.67. This places the January 2009 16 Put (XJZ MP) -- currently available for $226* -- into the money by some 27 cents, making it a relatively low risk option contract.
This contract carries a delta of 0.3786. That is to say that it ought to gain some $38 dollars for each dollar the XLF loses.
Here’s how I would expect this tactic to play out. Each time a minor XLF component folds up shop, I would look for an immediate $1 loss in the XLF. This event should boost each XLF put contract some 17%. The magnifying effect ought to double the ETF’s loss and the put options gain to 36%.
A major player should double both that initial figure and the magnified loss. When one of Wall Street’s 800 lb. gorillas goes under, you could take home gains as high as 68%.
Now, I have to warn you that this technique is now limited by the dramatic losses the sector has already suffered. However, I am convinced that the ongoing losses Wall Street is experiencing could still cut this ETF in half.
An $8 drop in the XLF would drive your put gains as high as 135%.
As you can see that you can still make money even though things look bad right now. That's the beauty of my WaveStrength System. Not only does WaveStrength show you how to protect your assets, it also shows you how to turn even the most dire situations into a pile of money.
Adam Lass is Senior Editor, WaveStrength Options Weekly
Courtesy: www.taipanpublishinggroup.com
