April 19, 2022

Dueling Banks

The markets bounced around on Monday, with no major moves through midday trading.   The financials and some industrials reported earnings Bank of America beat earnings expectations of $.78/share and delivered $.80/share.  Shares were up at one point over 4%.

What I found interesting was that while JPMorgan spoke of anticipating loan-losses to increase in the next quarter, Bank of America came out saying their loan-losses dropped by 53% from a year earlier.  And what about next quarter?  Bank of America set aside $30 million, which is far less than the $468 million expected by analysts.  Remember that JPM added to their loan-loss reserve by $902 million.  Which bank will be right?  

It’s not that simple.  Bank of America is more of a main-street bank, collecting most of their revenue from credit.  Consumers are spending and taking out loans for goods and services.  Add a near record low in loan losses, and you have positive results.  Even though their revenue increased, their profits decreased, which is still something I’d watch out for in the future.

JPM on the other hand is a case of weaker Wall Street banking.  JPM is building reserves in case a recession does happen, which will affect their corporate loans.


Today I want to take a look at an ETF for the 20-year Treasury Bonds.  The ticker is TLT.


Let’s take a look at the weekly chart and look at the Relative Strength Indicator.  The RSI is currently below 30, which can mean it’s in an oversold condition.  Looking at the chart, we haven’t seen these conditions since March of 2021.  


Bonds typically operate inversely to stocks, so as stocks are going down, TLT would go up.  However, there is a relationship between Treasury yield bonds and interest rates.  Usually if we are predicting interest rates to rise in the future, it is best to avoid long-term bonds, like TLT that could lock in a lower interest rate.  That said, this is an interesting chart that catches my attention and will plan on following it to see what happens.



Here are your leading sectors thus far this week. 


Yesterday I spoke about the wheel strategy and how you can create a system of selling puts and buying calls on the same stock to generate income. If you research the wheel strategy further, you get a lot of opinions on where to sell your puts and calls. And I hate to break it to everyone, but the answer is… it depends on the stock.

If you have a stock like NVDA or MSFT, you can still get 1% of premium going further away from the current stock price. If you’re looking at a lower priced stock, like American Airlines, the premium difference between a .30 delta and a .40 delta is slim and a .15 delta gets you pennies.

I started my back-testing journey on AAL saying I was going to sell puts at 30 days with a .40 delta and if I was put shares, I’d sell covered calls close to 45 days to expiration at a .15 delta. Why the difference in deltas? When you’re selling puts, you want to make sure you capitalize on appreciation of the underlying stock.

I back tested it for one year and the total position is down $202 on an initial $2203 investment. Mind you the stock dropped 24% in a buy-and-hold strategy.

You may be tempted to do this weekly, since AAL has weekly options. If you are going to play a lower-priced stock on a weekly basis, I tested selling .40 delta puts and buying calls at .30 delta. Typically this represented a 0.5-1.0% premium per week. Your commissions will definitely increase and it requires more effort to trade weekly, but your net premium would have been about $796, or a 36% gain while the stock was down 24%.

I’ve backtested several stocks and as I said before, the days-to-expiration and deltas depend on the stock and the manual effort to backtest these is immense. If anyone has better ideas for backtesting the wheel, let me know.

Who wants to spend hours (yes, hours) backtesting when Dave Durham does all the work for you? In Dave’s Triple Play Trader service, He does the work for you! And right now he’s offering you a 90-day trial membership. It’s too good of an offer to pass up.

If you have any questions, comments, or anything we can help with, reach us at any time.



Editor, Wealthy Investor Society


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