Community bank news has filled the airwaves with the collapse of Silicon Valley Bank and JPMorgan Chase buying First Republic Bank with a special letter from the Comptroller of the Currency.
This resulted in a sharp fall in prices of the regional banks across the U.S. as seen in the SPDR S&P Regional Bank ETF.
Now, Michael Burry (think "The Big Short" and Christian Bale's character) holds almost 8% of his portfolio in New York Community Bancorp. Today, we're going to take advantage of the research from several hedge funds that suggests the strongest of these community banks is NYCB.
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The trade is a custom bullish trade that allows us to acquire the stock at a discount from the 11 per share where it currently sits. We will buy an in-the-money call for June expiration and we will sell an out-of-the-money put for October.
NOTE: The prices quoted are the current ones but if the speech from the Fed Chair today shakes markets up, you will pay less for the call and collect more for the put, so consider waiting until Monday to find this trade's sweet spot.
- Buy to open 1 NYCB June 16 monthly 10 strike call at 1.25
- Sell to open 1 NYCB Oct. 20 monthly 10 strike put at 0.65
This trade results in a debit of 0.60.
Defending The Trade On New York Community Bank
With a Composite Rating of 89, NYCB is ranked No. 1 in IBD's savings & loan industry group.
Combined with the recent fade in price, the technical composition of the ratings and the drive toward these regionals from hedge funds and bigger investors, it is one of the rare spaces that I have chosen a purely bullish trade.
The potential high profit line for the trade is calculated in the following way:
I will collect the stock in June at the price of 11.25 if prices stay above the 10 strike. Incidentally, the stock recorded one of its highest volume days in recent months on Wednesday, and that price was 11.
If the stock does not lose the 10 price point before October, I will see the expiration of my short put worthless and I will have collected 0.65 per share, and my new price point for the stock will be 11.25 less the fully collected premium from the short put. That makes my cost basis 10.60 per share before commissions.
Trade Management
Identify the key chart levels.
The breakout level is 14; the breakdown level is 9.50. Our premise is that this chart could fade off highs next week, but should be close to the ranges noted.
Scenarios For NYCB Custom Trade
What could happen:
- The stock holds steady or moves up. This will give us the greatest returns.
- The stock breaks support at 9.50 and we must exit the trade by selling the call and buying back the put.
Set an alert for the prices on the edges and when they trigger. Give the trade a few days to wiggle through and then make your decisions based on your own risk profile.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
