stocks on the rise

Long gone are the days when bank stocks were safe investments. Now, and for the foreseeable future, the only safe way to play banks and financials is by trading them.

Banks face so many issues, both in the near term and on a long-term secular basis, that putting shares away, even now when they look cheap, could be hazardous to your wealth and your mental state.

On the other hand, precisely because many of the headwinds banks face are obvious, closely following the developments affecting banks can lead to profitable trading opportunities. And, by familiarizing yourself with how bank stocks trade, you'll be in an excellent position to determine exactly when they've become good long-term holds.

As a trader, I'm always looking for sectors and stocks where developments affecting earnings and profitability are mainstream news. It means I don't have to mine mountains of arcane data to get the big picture. And right now, all the news coming out about banks makes them ripe for trading.

Here's what I look at and how I would trade bank stocks.

Banking on Volatility

The first thing I see when I'm looking at banks is that most of them have been exceptionally volatile. Volatility is the lifeblood of trading. They've definitely got that going for them.

The most common measure of an individual stock's volatility is how it compares to the volatility of the market as a whole. Beta measures how volatile a stock is relative to the Standard & Poor's 500 Index. A beta of "1" means that the stock is as volatile as the market. A beta of "2" means the stock is twice as volatile as the market.

Here are some betas for bank stocks you should consider as good trading candidates: Bank of America Corp.'s (NYSE: BAC) beta is 2.76; Citigroup Inc.'s (NYSE: C) is 2.89; Wells Fargo & Co. (NYSE: WFC) 1.78; Morgan Stanley's (NYSE: MS) is 1.10; JPMorgan Chase & Co.'s (NYSE: JPM) is 1.43; and Goldman Sachs Group Inc.'s (NYSE: GS) is 1.26.

There are many very volatile European banks to trade, too. But these are even riskier. Personally, I don't like unanticipated volatility. I like to understand what is happening, what developments are ebbing and flowing to generate volatility.

With the banks, there's a fairly long list of negative headwinds, which is where their e mbedded volatility comes from.

Big Questions For Bank Stocks

U.S. banks, and even more-so their European counterparts, are facing some very big issues. Each hurdle is big in and of itself, and collectively they form a tremendous weight on the sector.

The biggest question marks are: