NEW YORK ( TheStreet) -- For a market not expected to do much before the election, it's hard to deny we are in a bull market. The S&P 500 ETF ( SPY) chart is trending higher with the widely followed moving averages all pointing north.While many market pundits were busy building a wall of worry, others were busy making money. It's hard to say what the SPY and the overall market will do in front of the election, but even with the market giving back gains, many in the banking sector already have low growth priced in. Banking suffers from future unknowns. Wall Street hates problems without a clear and convincing level of risk exposure. The problems with housing and high unemployment appear to have no end in sight. Nothing out of Congress or the White House suggests a change anytime soon either. The Libor rate-fixing scandals could snapback and create exposures that may not appear on the radar for any given U.S. bank at this time. Considering the fact that the big U.S. banks are really big global banks means earnings may take hits for some time. Currently, we know Bank of America ( BAC), Citigroup ( C), and JPMorgan Chase ( JPM) possibly face exposure based on lawsuits that have been filed against them. Because the banks have many of the problems built into the price, if the storm clouds do pass more quickly than expected (and they will pass at some point, they always do), the payoff could be huge. Banking offers the classic "heads I win, tails I break even" that investors search for. It's far from a sure thing, but when the odds are in your favor you want to exploit it for what you can. In order to mitigate your risk exposure, take a look at writing covered calls. Writing covered calls will lower your total risk per share, pay you for each passing day as a result of time decay and increase the odds you will make money. The downside is you risk getting left behind if your stock really takes off higher. This article isn't about hitting home runs, and more for those that want to bring home solid and consistent results. I selected November as my primary expiration month because the expiration date is after the election and gives time for the market to digest the results. Some banks are better than others so let's take a look and see what we find.
Wells Fargo has a bullish technical chart pattern based on the 60- and 200-day moving averages, both averages are steadily climbing a wall of worry to higher profits. Trend followers love this pattern and will hold a position until a technical break results in a signal to exit. Wells Fargo is attractive fundamentally also. The trailing 12 month price-to-earnings ratio is 11.3, and analysts estimate $3.32 per share in earnings this year. The company currently pays 88 cents per share in dividends for a yield of 2.58%. Wells Fargo doesn't pay the highest dividend yield in this group, but if you're willing to forego a small amount of yield for safety, Well Fargo offers a compelling argument in this space. Short sellers are next to impossible to find. Short interest is so low I only include it to demonstrate the smart money is not betting against this company: 0.8% of the float is short based on the last reported numbers.
Bank of America ( BAC) "Bank" is often one of the top 10 most actively traded stocks. Traders love trying to squeeze pennies out of it every day. Some are better than others, but that doesn't change the longer term moves investors can expect. The high activity rate for Bank results in investors having the ability to enter or exit from pre-market to the closing of the aftermarket session with almost zero slippage. I believe high activity lowers the transaction costs for everyone. Book Value: $21.90 The price-to-earnings multiple demonstrates Wall Street doesn't believe Bank will grow earnings soon, but simultaneously, investors don't need growth to profit handsomely with shares as cheap as they are. On a positive note, the average one-year price target is $9.63 and short interest is very small at 2.1%. The 60-day moving average is bullishly above the 200-day moving average. After testing the 200-day moving average support level several times this summer, BAC appears poised to continue moving higher. The company currently pays a paltry 4 cents per share dividend for a yield of .5%. Absent an increase in dividends, don't expect to make a lot from the yield, but we don't need to in order to make bank with Bank. The November $8 strike calls can be bought for about 53 cents, and $9 strike calls can be sold for about 19 cents. The options are priced relatively cheap considering the moves the stock has had recently. This makes a debit spread more attractive than a covered call in my opinion. This type of option spread has an even lower risk than a covered call, while also lowering the time decay. With a current stock price of $8, the maximum possible return is 66 cents for a gain of 90% in less than 80 days. Bank will need to increase to $8.34 to breakeven by the expiration date, and the maximum risk is 34 cents per share. If Bank is trading above $9 per share at expiration, you lose out on everything above $9 per share, but a 90% gain will aid in your comfort. Aside from the 34 cents per share risk, the next biggest downside to this strategy is Bank does have to move higher just to break even.