Bank on This Option


Jared Woodard Image Jared Woodard Principal, Condor Options

Option trader Jared Woodard of offers a trade idea based on one of the cheapest options in the Eurostoxx 50, with a historically flat implied volatility skew, to boot.

After being down nearly 20% over the summer, Barclays (BCS) shares have rallied steadily through the fall and are set to close the year with a 35% gain. In spite of recent performance, the bank is still trading at a 25% discount to its peers. Improving fundamentals and historically cheap option implied volatility make upside call spreads look attractive through January.

Fig. 1. Barclays PLC ADR (BCS) and Financial Sector SPDR (XLF), 2012. Source: Yahoo!
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With much of the UK still mired in a fog of voluntary austerity, the prospects for major banks there have not been that bright, but Funding for Lending Scheme (FLS) data from the Bank of England released last week showed that Barclays drew £1bn in FLS funding, which should have a positive impact on margins; in a note on the data, Deutsche Bank analysts commented that, “We do not expect banks to use much funding, which they cannot demonstrate has been passed to customers.” Banks generally have plenty of liquidity, but in addition to its titular purpose, FLS allows banks to replace more expensive wholesale funding with cheaper liquidity from the central bank.