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A Bank’s Expansion Could Give Traders a Gain of More than 70%

A Bank’s Expansion Could Give Traders a Gain of More than 70%

Sometimes, small announcements will have possible trade set ups for traders. That is the case for a company that is also being added to the S&P 500.

PR Newswire recently reported that First Republic Bank (NYSEL FRC) will replace SCANA Corporation (SCG) in the S&P 500 effective prior to the open of trading on Wednesday, January 2, 2019.

S&P 500 constituent Dominion Energy (NYSE:D) is acquiring SCANA Corporation in a deal expected to be completed soon pending final conditions.

First Republic Bank is also expanding, according to Business Wire.

First Republic Bank is a leading private bank and wealth management company, that recently announced the opening of a new office in Jackson, Wyoming.

First Republic’s office at 545 West Broadway will provide full-service private banking, private business banking, real estate lending, wealth management, brokerage and trust services to individuals, their families and the businesses they own and manage.

Alex McDougall, who has 11 years of banking experience, will manage the new office. McDougall has worked for First Republic for six years, most recently as an assistant manager and a preferred banker. Previously, McDougall was an assistant manager with BB&T for five years.

“First Republic looks forward to serving the banking and wealth management needs of Jackson and being an active partner in the community,” said Jim Herbert, CEO and Chairman of First Republic Bank.

First Republic has more than 70 offices, primarily in urban, coastal markets in the United States. Through its relationship-based approach, First Republic helps clients meet their financial objectives by providing a single point-of-contact and seamlessly delivering banking and wealth management services.

The addition of a branch in Jackson could be important because of its location in one of the richest counties in the country.

Teton County, Wyoming, is consistently near the top of the list for highest average income in the United States, according to Tax Stats data released by the IRS.

The average income in Teton—known for hiking, skiing, and multimillion dollar Jackson Hole ranches—is nearly $300,000. Compare that with $62,483 for the average American household.

Of course, average income figures don’t give you a good picture of how much a typical resident makes, since super-rich outliers can skew the data (median figures were not released), but this list gives you a good idea of where many of America’s millionaires and billionaires hang out.

This all bodes well for the stock which jumped on its inclusion in the S&P 500 Index.

FRC daily chart

The jump marks a reversal and the new business opportunity could provide support to the company’s fundamentals.

FRC weekly stock chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying FRC could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread chart

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for FRC

For FRC, the January 18 options allow a trader to gain exposure to the stock.

A January 18 $90 call option can be bought for about $2.67 and the January 18 $95 call could be sold for about $0.85. This trade would cost $1.82 to open, or $182 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $182.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in FRC the maximum gain is $3.18 ($95 – $90 = $5.00; $5.00 – $1.82 = $3.80). This represents $318 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $182 to open this trade.

That is a potential gain of about 74% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.