This is How I'm Leveraging the Regional Banks

Yesterday we took a look at the regional bank sector by way of analysis of the S&P Regional Banking ETF (KRE).

If you didn't catch my analysis of the situation currently unfolding in this key sector, then take a moment to catch up.

Let's take just a moment for an update because things have changed a bit.

KRE shares were trading higher yesterday as I was writing this...

"This is the last push for the headliners to control the narrative for the next two to three months."

Today, the KRE is trading 1.25% lower as this key ETF is sliding back towards a critical test of the $42.50 level.  A break below that "Maginot Line" of technical support is likely to send the KRE tumbling as much as 13% to what I see as the next level of support.

Now, you can prepare for this move like me by holding puts on the KRE.

This is a simple approach to taking advantage of the deteriorating trend in the regionals.

My Alpha Accelerator subscribers are currently holding a put position on the KRE that is up more than 35% as we head into the seasonally weak end of September.

Now, if you want to get a little more tactical, to generate even more profit potential, you look at the components of the regional bank ETF (KRE) to find a few extra opportunities.

The S&P Regional Banking ETF holds 140 different stocks, providing ample opportunity to leverage the sector's weakness.

As is always the case, I filtered the sector to find stocks that are trading below their bearishly trending 50-day moving averages.  This resulted in a list of 40 stocks.

As always is the case, my next step is to go through the options activity on this group of stocks and then the fundamental and technical analysis of each prospective trade.

This determines a few things.

First, it tells me if the market's expectations are out of sync with the stock's fundamental and price profile.

Second, if the options market is robust enough for a valuable trade.

Third, target prices for the underlying stock as well as something I refer to as the "tipping point" or "trigger" price for each stock.  This is the price that my analysis determines as the point where the market is likely to start increasing their selling, which accelerates the stock's move in our direction.

Two stocks are high on my list to leverage the expected move lower in the regional bank sector.

First Financial Bancorp (FFBC) and Prosperity Bancshares, Inc. (PB).

Let's walk through First Financial Bancorp (FFBC).

First of all, "smile when you say that", FFBC is headquartered here in Cincinnati.  As a matter of fact, I can see their headquarters on East Fifth Street from my office window.  I know the bank and its roots well.

In a different environment, I would be touting this stock as a buy based on their regional expansion.  As a matter of fact, I think the stock is likely to become a takeover candidate at some point as the regional banks see merger activity over the next few years.

But in the short term, the stock is set to head lower.

From a technical perspective, FFBC shares are sitting just above their Tipping Point Price of $20.

A break below this price will trigger two things.

First, the $20 level is a round-numbered price.  Round-numbered prices have always provided psychological triggers for stocks and the market.  A close below $20 will cause an increase in the market's selling, pushing the stock lower.

Second, a break below $20 will trigger a volatility breakout as the stock breaks below its bottom Bollinger Band.  Today, the distance between the top and bottom Bollinger Bands is at some of its lowest readings in the last year.  

This suggests that the stock is preparing for a fast and aggressive directional move.

Based on the current trend of the 20- and 50-day moving averages, that directional move should be to the downside.

My target price for the coming breakdown is $18.  That move represents an 11% swing lower for FFBC shares.  It is possible that the stock may move lower than that to $17.50, but for now my target is $18.00.

Using the Trigger and Target prices I've determined, I select my put option based on a 2-4-week timeline.  October expiration options won't provide the necessary time window for the expected move, so the November puts are my expiration selection.

The $20 puts are almost perfect as they are at the money and will provide more acceleration for the option as they move in the money on the expected breakdown.

With that information, you've got the November 17, 2023 FFBC $20 puts as a potential trade to leverage the weakness in the regional banks.

A break to my target price within the next three weeks should yield a return better than 100% as the theoretical value of that option with the stock at $18 in the next three weeks would be almost $3.00.

I'll circle back around in the next few weeks to update you on this position.  I've added it to my account this afternoon.

As always, I wish you the best trading success.


The post appeared first on Penny Hawk.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

Read full bio