This Broker's Resurgence Means a 250% Win for Us

Remember the E*TRADE baby commercials?

I used to love those ads, especially the first one I saw in 2010, but I was convinced when I saw E*TRADE Financial Corp. (NASDAQ: ETFC) running them on that Super Bowl Sunday that they were throwing another "Hail Mary" pass. Fittingly for a commercial spot during a football game, the term indicates a last-ditch, desperate effort to win in the late stages of a game.

The flaw with my reasoning back then was that I had no concept of a commercial going "viral." In fact, I don't think that anyone did at that time. We were barely coming out of one of the worst periods of U.S. history, when banks, mortgages, and real estate failed, seemingly at once.

Today E*TRADE has proven it's anything but desperate, and we're going to pay ourselves handsomely on its rebound....

Each Surge in Share Price Means More Profits for Us

Since I first saw the E*TRADE commercial, our banks have gotten stronger, mortgages are slowly creeping back, and real estate is making a staggered recovery.

And E*TRADE Financial is proving an amazing story. Here's a company that just a few years ago was on the brink of bankruptcy, and yet they were willing to throw $1 million at a 30-second ad that ultimately helped them get back into the brokerage game. Take a look at the chart over just the last two years and see for yourself.

broker's resurgenceThis stock has more than doubled since June 2013. Sure, it took its sweet time catching up with the rest of the financial community, but better late than never, I say!

Now the million-dollar question is will this "baby" move into bigger clothes and, more importantly, a higher stock price?

I believe E*TRADE stock will continue to do well for two reasons.

First, it's one of the bigger firms that still looks at the smaller trading accounts as assets to them. Now don't get me wrong, I love the brokerages such as Charles Schwab Corp. (NYSE: SCHW), TD Ameritrade Holding Corp. (NYSE: AMTD), and Interactive Brokers Group Inc. (NASDAQ: IBKR).

What's cool about all these firms is that, to the naked eye, they're all competing against each other, but each one has its own niche. Schwab looks towards advisory services and bigger accounts, while TD Ameritrade is focusing on the active trader with their Think or Swim (ToS) platform. Then there's Interactive Brokers Group, with some of the lowest commission and margin rates in the business.

But who has the "little guy's" back?

Who has a platform that's not only easy, but seamless for the beginner?

You guessed it: E*TRADE.

The other thing going for E*TRADE as well as the other above firms is that they are great interest rate plays. Nearly every time we see a significant move down in bonds, these stocks react positively.

Look at last week's jobs report. Jobs increased on average, the Dow reacted to the downside, but look at what I'll call our "Interest Rate Defense Stocks." They jumped!

ETFC stock

Here's Exactly How to Play This Stock's Moves

I believe this is the beginning. Whether the economy improves or not, commodity prices are going up. The government is going to have to increase rates to combat inflation, no matter if it's perceived or real.
Each of these firms stand to make millions on interest on cash in their accounts, which improves their bottom line. So let's not forget the E*TRADE "baby" that is bringing us to the interest rate dance, and we can do this with less risk and cost than owning the stock.

Right now, 100 shares of ETFC stock is going to cost you about $3,061, plus commissions.

There has to be a way to create a trade with a longer-term outlook on the stock without laying out so much cash.E*TRADE stock

Let's move over and let someone else buy the stock. I have a great trading idea that will allow us to purchase the stock at a lower cost and force us out of the trade at a higher price.

The trade above is known as a "Bull Call Spread." It's bullish, uses calls, and is a spread between a buy price and a sell price.

We are looking at the ETFC January 2016 $33 calls and ETFC January 2016 $36 calls for Jan. 15, 2016. Yes, that's over 7 months away, but this isn't a quick trade. We aren't sure exactly if or when interest rates will rise, and we want to protect ourselves in the process.

The trade involves buying the ETFC January 2016 $33 calls and selling the ETFC January 2016 $36 calls calls, all at a combined price of $87 per spread. That's cheap!

Now in order to profit from this trade, we need E*TRADE to move higher over the next seven months. If it does, the $33 calls will move up faster than the $36 calls, thereby widening our spread. Remember the spread is designed to limit risk, and if this moves like I expect it to, we could be looking at a near 250% return by early next year!

Get that baby a Happy New Year Hat; it will be celebration time come next year!

About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

Read full bio