Long-Forgotten Financial Stocks Get a Second Look in Options Pits

The makings of a relief rally in the stock market have some options strategists suggesting it's time to get into financial stocks.

The financial sector has been badly beaten in recent months, which makes it a good time to go options-shopping, according to two strategists we checked in with ahead of Tuesday's important Federal Open Market Committee meeting.

Volatility Index Today % Change 26.22 -0.76 Source: ILX

What was Rod Jamieson, options strategist with Everen Securities in Chicago, telling his clients on a hold-your-breath day like Monday?

Since we held a gun to his head, Jamieson said he'd "go with a few bank call options -- and pray."

"My thinking is we're not going to get a rate increase this month," the strategist said. "It might come in November. Even if we do get a rate increase tomorrow, the market has already priced that in."

Put/Call Ratio Today (Noon) Previous Close 0.53 0.55 Source: ILX

Maybe it seems counterintuitive to look at banking issues in a rising-rate environment. But, suggested Tom Dorsey, president of Dorsey Wright in Richmond, Va., take note of bank stocks that have done well as the sector was "obliterated" in recent months. He's a believer that a rate increase is due Tuesday. Even so, he recommends purchasing call options in slump-resistant sector standouts such as Citigroup (C Quote) and Wells Fargo (WFC Quote) as a lower-cost alternative to buying the shares.

Take Citigroup, Dorsey said. With the stock at around 43, "you could buy call options with a strike price at around 40, expiring five to six months from now." But, the trader cautioned, "only put in the amount you would have risked in the stock." In other words, if you would have bought 200 shares, buy just two call options (each call option contract represents the right to purchase 100 shares). "Don't overleverage yourself," Dorsey said. "Just look at it as a proxy -- hold it until expiration."

Roughly five months out, 2000 March 40 calls in Citigroup last traded at prices ranging from 6 5/8 ($662.50) to 7 3/8 ($737.50). Jamieson, for his part, recommends a shorter-term call option, dated for expiration in, say, November. Wells Fargo, with its stock at 40 7/16, most recently saw November 40 calls trading at 2 3/4 ($275).

Financial Woes Tracking bank stocks' late-summer underperformance

Source: BigCharts

Separately, Maxtor (MXTR Quote) logged in another day of heavy options trading, this one most likely related to an 800,000-share block that crossed Monday morning at a price of 6 1/2. Maxtor develops, manufactures and markets hard-disk-drive products to customers who sell their products in the PC industry. Roughly 6,000 contracts in the November 5 ($500) calls and 4,000 contracts in November 7 1/2 ($750) puts traded in conjunction with the block of stock.

Lastly, remember those RCN (RCNC Quote) calls buzzing last week? The RCN October 40 calls that last Friday were fetching 2 15/16 ($293.75) and the 45 calls worth around 1 3/8 ($137.50)? Well, The Wall Street Journal reported Monday that media mogul Paul Allen is set to invest $1.65 billion in the telecommunications company, sending the stock price up 5 to 43.

So at midday Monday, those October 40 calls were trading at 4 3/8 ($437.50) and the 45 calls were at 1 1/2 ($150).