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Banker’s Acceptance

Richard Croft
February 21, 2011
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The financial sector has taken off in February, advancing about 6% so far this month, after being range-bound since last October. Economic growth, an improving earnings picture, growing business confidence, and increasing lending activity are contributing to renewed interest in the Canadian financial sector. Not to mention the possibility of dividend increases among the Canadian banks.

When you consider the possibilities, there may be more to come. Shares of Bank of Montreal (TSX: BMO, $61.38) and CIBC (TSX: CM, $81.81) look particularly interesting. With both stocks yielding more than 4% per annum, a hike in their dividend payout would bolster investor confidence. And that would mean a higher stock price.

Which you consider the fact that options are still relatively inexpensive, call buying seems to be the appropriate strategy to take advantage of a bullish scenario. With BMO, look at the July 62 calls at $1.85, or with CM, the July 82 calls at $2.95 per share.

You might also look at calls on a broad based liquid exchange-traded funds. An example would include the iShares S&P/TSX Capped Financials Index Fund (TSX: XFN, $24.68) which represents a cross-section of blue-chip stocks within the Canadian financial sector.

The downside with this sector play is the inclusion of insurance stocks within the financials index. Investors are not nearly as enthused about insurance stocks as they are for the Canadian banks. As such, insurance stocks could act as a drag on the sector over the near term.

On the other hand, the index offers diversification – albeit within one sector – and XFN options are actually less expensive (i.e. lower implied volatility) than are the options on Canadian banks. With that said, the XFN June 25 calls at 55 cents per share look interesting.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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