Canadian Banks Topping Today’s Most Active

After demonstrating how to take a confident stance on Toronto Dominion Bank using a protective put in last weeks blog titled Repositioning Using Puts , we see that a number of Canadian banks are starting the week off strong, occupying 6 of the 10 spots on today’s Most Active Options list:

If an investor had a specific expectation or preference to any one the banks highlighted above, the solution would be to take a position by purchasing the shares, using an option strategy or a combination of the two. However, if the outlook was not specific to a particular bank, but more based on a bullish outlook for the entire Canadian banking sector an exchange Traded Fund (ETF) could be selected to meet the investors objectives.

As a reminder, an ETF is a financial security that can be bought and sold on an exchange like common publicly traded shares. The difference is the share or unit value reflects the net asset value of a portfolio of stocks much like a typical mutual fund. The main difference is that the ETF offers the investor the ability to buy and sell at their discretion throughout the day while benefiting from the diversification of holdings. One other major consideration is that many ETF’s are options eligible. For a full list of all of the currently available options eligible Canadian ETF’s CLICK HERE.

The BMO S&P/TSX Equal Weight Banks Index ETF – symbol (TMX:ZEB) is an ETF comprised of Canadian banks. As of December 6th, 2013 the top holdings were as follows:

For more information on this ETF, please visit the BMO S&P/TSX Equal Banks Index ETF spec sheet.

As you will notice, all of the banks on today’s most active list are included in the composition of the ZEB. For the investor who would like exposure to this sector, but does not want to pick and choose between stocks, this is an ideal solution. The benefit is that any significant negative price action due to the unique circumstances of an individual bank is mitigated because it is averaged into the basket of stocks. The obvious draw back is that if one particular banking stock is outperforming, this is also mitigated by the average. Regardless, if “the tide comes in, and all ships rise” in the banking sector, the investor should participate in an appreciation of ZEB shares

There are a number of ways to participate in the longer term appreciation of ZEB shares.

• Buy the shares outright (unlimited profit, unidentified risk)
• Buy the shares and add a protective put (unlimited profit, identifiable risk but increased break even)
• Covered Call (limited profit, unidentifiable risk, benefit of cash flow)
• Buy the shares and collar them (limited profit, identifiable risk)
• Long term option (limited risk, unlimited profit)
• Longer term call Debit Spread (reduced cost, limited risk, limited profit)
• Longer term Calender Spread (ongoing reduction in cost, limited risk, limited profit but the ability to adjust as shares appreciate)