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Malandrino/Raschke: AMTD Tag Team

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Jill: Over the past few weeks, I have been doing some homework on the online brokers. Once we get resolution and clarity into the fiscal cliff situation, whether favorable or not, I believe the retail investor is going to come back to the market. And when they come back, the retail trader goes in long and puts some cash to work, of which there is a significant amount on the sidelines. There is much more value in quality companies that could potentially offer a better rate of return via price appreciation and getting paid to hold cash-rich names through dividends and buybacks compared to the insanely low interest rate environment we live in now.

TD Ameritrade (AMTD) is a stock that I believe offers that value and will outperform relative to its peers, Charles Schwab (SCHW) and E TRADE (ETFC). Of the three names, AMTD is the most attractive when looking at the multiple, sports the highest profit and operating metrics and rewards investors with a 2.3% dividend yield. Compass Point, a sell-side institutional research shop, initiated coverage last week and pointed out that AMTD historically has been active in returning capital to shareholders, and although buyback activity may be slowing, they expect continued cash flow generation to provide flexibility to pay a special dividend or become more aggressive through M&A later on.

Yes, the latest monthly reporting metrics for October showed another decline in average daily trading volume for the brokers, all three CEOs agree that there will be a turn around in volume for 2013. In fact, AMTD's CEO expects ADV to pick up by 30,000 trades per day (That's about 10% more than the 330,000 reported for October!). Another key point is AMTD reported total client assets were up 16% year-over-year, again, lending to the significant amount of cash waiting to be put to work. Once we see volume return to the market, I believe AMTD is the best positioned to capitalize from that. Not to mention what a more normalize interest rate environment will do for the balance sheet.

Skip and I are in agreement that AMTD represents excellent value from a fundamental perspective. Let's turn to the charts for price action clues and see how we would play the name with a 100% risk controlled strategy.

Skip: AMTD has a technical pattern that I see a lot now. The pattern is an elongated W type. The W pattern is one where once the right leg is overcome then the breakout to new or sometimes all-time highs comes into play in a big way. Momentum type traders and fund managers jump on these stocks with these breakout patterns, as those stocks have excellent potential once breaking out to take the shorts for one hellacious ride up.

For AMTD to once again test the high teens to $20+ level, I think its longer-term chart patterns indicate that it has the potential to do so. Thus, the time to do so is the big question.

I look at AMTD vols and see that the mid 20s is the current options volatility level. However, when I look into LEAP-land those vols jump up to almost 30. That divergence in the vols in the LEAP markets, as well as being bullish on AMTD's longer-term prospects, makes for a nice combination to encourage a look for a bullish at the money vertical call spread in AMTD.

This trade is medium in risk because it is 100% hedged, while medium in reward because the hedge caps profit potential.

Trades: Buy to open 3 AMTD Jan14 15 calls for $2.00 and sell to open 3 AMTD Jan14 20 strike calls at $0.40.

The total risk for the spread is $1.60.

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