E*TRADE Financial Corporation (NASDAQ: ETFC) shares are making an early jump today after the company announced it has sold about $3 billion of mortgage-backed securities and municipal bonds. The sale was part of a restructuring plan to reduce risk and maintain higher capital levels. The sale will result in a loss of less than $5 million, according to the company.
ETFC also said it will exit its institutional trading business. Both moves are part of an attempt to give the company added ballast in the wake of write-downs related to the sub-prime crisis. If you think that the company may have finally found the bottom, then now could be a good time to look at a bullish hedged trade on ETFC.
After hitting a one-year high of $26.08 in last January, the stock hit a new one-year low of $2.08 yesterday. ETFC opened this morning at $2.60. So far today the stock has hit a low of $2.35 and a high of $2.60. As of 11:10, ETFC is trading at $2.42, up $0.17 (7.5%). The chart for ETFC looks bearish but improving, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a January '09 covered call at the $2.50 level. A covered call is a combination option and stock position that combines the purchase of stock with the sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 98.5% return in just one year if ETFC is above $2.50 at expiration next January. E*TRADE would have to fall by more than 45% before we would start to lose money on this trade.
ETFC has shown support above $2.00 recently. This trade could be risky if there is even more bad news to come on ETFC, but if you think the bottom has arrived or could be here shortly, then this trade is a way to hedge into ETFC.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent controls a long position in ETFC. Your sympathy is welcome in the comments section.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
1-14-2008 @ 2:26PM
mita said...
E Trade's earning report is on 24th, and fed meets on 29th. How should we play around this events?