Royal Opportunity

Patrick Ceresna
March 1, 2013
5 minutes read

Investors that have been heavily invested in Canadian banks have not been disappointed. Recently Royal Bank (TSX: RY) announced stellar earnings of more than $2 billion dollars. This was surprising to some skeptics as there are clear economic statistics suggesting a slowing in real estate and the Canadian economy as a whole.

For more details reference the Financial Post article – http://business.financialpost.com/2013/02/28/no-sign-of-consumer-debt-crunch-as-banks-report-blowout-quarter/. There is no denying that the banks keep delivering. The question for many – is it time to buy if you have been on the sidelines?

Steadfast bank investors immediately reference the impressive dividends the banks continue to pay as a justification to indiscriminately accumulating. While there are numerous mythologies to invest, one cannot deny the long term benefits of consistent dividend investing.

At the same time, one cannot ignore simple technical observations. Over the last 2 years the shares of Royal have had 3 distinct distribution cycles that has seen the stock decline in the $5-$20 range each time. With the stock being up 30+% since last summer, one has to recognize the stock market is indecisive and can deliver the unexpected.

So what is an interesting way for investors to play Royal Bank?

Here are the facts:

  • Royal Bank is trading at $64.12 (02/28/13)
  • Royal Bank is paying a $0.60 dividend on April 23rd.
  • The stock was trading $10.00 lower just 3 months ago, certainly not a buy low opportunity.

At the same time if an investor does not buy today, the markets can continue to advance throughout the next few months, leaving timid investors on the sidelines.

For the stock investor, it has to be a black and white decision to buy. An investor utilizing options can apply a simple strategy as an alternative to buying the stock outright. In today’s blog, we will use a traditional call option as a method of entering the Royal Bank Position. If you are brand new to options, view this short educational video. http://www.m-x.tv/media/buying-call-options

As an investor, we want to buy 1,000 Royal Bank shares, but we will use the call option as our entry strategy.

In this example we buy the April $64.00 call for $1.25. The option expires April 19th, which is 4 days prior to its next x-dividend date.

Here is my game plan.

  1. If Royal Bank stock continues higher and is trading anywhere above $64.00 come the options expiration, I will exercise my right to buy the shares at $64.00 and own the shares prior to the April 23rd dividend.
  2. By having the call options locking in the upside potential, I now have 6 weeks to try to accumulate the stock at much more attractive prices. If at any point over the next 6 weeks the market gives me the opportunity to buy Royal Bank shares at a discount to its current price, I will take advantage. Example – if we were to have a market correction that saw shares of Royal trade down to $60.00 a share over the next 4 weeks, I would immediately buy the shares down there.

What has this done? I have created a strategy that will give me a second chance at a first entry. Think about it. If I was wrong for wanting to own Royal now, the call will expire but I will have a chance to buy the shares months from now at much better prices. In the same regards, if Royal continues higher, I have fixed a $64.00 entry and will own the shares prior to its next dividend.

This may not appeal to all types of investors, but for traders and proactive investors, buying the call option represents a risk managed method of entering a new position in a great blue chip stock.

Patrick Ceresna
Patrick Ceresna http://www.bigpicturetrading.com

Derivatives Market Specialist

Big Picture Trading Inc.

Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading and the co-host of both the MacroVoices and the Market Huddle podcasts. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his role at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios.. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes to produce actionable trade ideas. With his expertise in options trading, he seeks to create asymmetric opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and actively teaches Big Picture Trading's Technical, Options, Trading and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.

124 posts

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll Up