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XLF: Banking on a Turn Around?

Treasury Secretary Geithner seems to me to be a competitive person. Thus, I think it is safe to assume he would desire the opportunity to go out on top, knowing that he did his best as he departs the Treasury. Logically, for him to be able to do just that, U.S. major banks must continue turning their "ships around" and improve their profitability. In order to get to that point, the U.S. economy must also begin to improve. Doing so will create a much better environment for the major banks to step up their lending, which is how they are supposed to make their profits.

Once that begins, those banks' dividends can be allowed by Secretary Geithner to increase, which in turn will cause a rush to buy those bank stocks. That done, Secretary Geithner can "saddle up his horse" and "ride off into the sunset" as our hero breaks out his laptop and begins to write his memoirs. The memoirs will probably be sold for many millions, making all that time he has lost sleep over the past several years quite worth suffering that period of insomnia. Cynical I know, but this line of thinking is not much of a mental leap and it is certainly not unprecedented.

Financial Select Sector SPDR (XLF) is an ETF that over the past several tumultuous years has become the best way to play the major banking sector. That is so because of the holdings of the sector as per the stocks in this ETF are the quintessential banking stocks of our country-- JPMorgan (JPM - Get Report), Wells Fargo (WFC - Get Report) , Bank of America (BAC - Get Report), Citigroup (C - Get Report) to name the top four.

Let's review the T3/OP video with Jill and Scott for the view on the group before jumping into the XLF idea:

XLF at some point in 2012 should once again test the upper end of the range as time is on the side of the banks. After all, XLF began 2011 around its highs for the year, that just over $17. Without the mortgage mess of 2011, XLF would probably be much higher today than even that of 17!

But we deal with reality here and reality says that XLF still has obstacles in its way as it claws back to "normal", or whatever the "new normal" for banks will become. Thus, time can be the ally of the bull as XLF slowly turns for the better. For options traders, that would lead us to the time spread strategy.

Consider a low risk call time spread in XLF. Time spreads can be highly rewarding if the shorted side of the time spread expires worthless and then the long side rallies due to the possible turning up of the underlying stock (or ETF).

Trades: Sell to open 3 XLF December 14 calls at $0.35 and buy to open 3 XLF February 14 calls for $0.70.

The total risk for the spread is the premium paid, or $0.35 per spread ($35). As always, I will monitor the trade on this site in the comments section below.

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BAC $11.95 0.00%
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XLF $20.49 0.00%
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