Put Selling Buffett’s Banks Part 1 – Bank Of New York Mellon Stock – BK Stock

In a recent CNBC interview, Warren Buffettt discussed 5 favorite banks which he believes will perform well into 2014. I thought I would take a look at 2 of them on the regular site and the other 3 banks on the members site.

The first bank is Bank of New York Mellon Corp which trades on New York under the symbol BK

Put Selling Bank Of New York Mellon Stock – BK

This is a small bank with revenue of just 3.3 billion. It does not meet my criteria for stocks I like to use for my stock and option strategies. Earnings are at $1.83 per share and the book value is at $31.31. This bank is not cheap trading at 17.1 times PE. Return on equity is at 5.98% and the annual dividend is 60 cents for a yield on Friday of 1.91%.

BK Stock – 5 Year Chart

The 5 year chart below shows that this bank is actually fairly easy for Put Selling and definitely would be easy for trading. In the crash of 2008 – 2009 it fell to a low of $15.44, but recovered quickly shortly after. In fact if you look at the chart you can see that in 2009 Put Selling the $25 valuation would have resulted in a very easy trade. $25 has certainly been a good level for a variety of strategies including naked calls, covered calls, spreads, iron condors, Put Selling and even butterflies. The most important aspect of BK Stock is that it has stayed in a decent range which is what makes it easy for Put Selling. 2012 would have been another great year for Put Selling and puts strikes between $20 to $23.00 would have been perfect starting in the fall of 2011 right up to the end of 2012.

Put Selling Strikes BK Stock 1 Year Chart

The one year BK Stock is more interested for our purposes. If I add in volume we can see that although this is a small regional bank there is a lot of interest in BK stock. There are many days when the volume is above average. This helps to increase the volatility in the stock which should help our option selling bring in higher premiums. You can see that the lower level of $25.75 really stands out. There is a lot of support at those levels right down to $24 in BK Stock which again makes Put Selling dead simple.

The next level with decent support is the $28.00 level. After that there is not a lot of support in BK stock as it has moved higher. I added in the accumulation distribution tool and you can see that BK stock since the start of the year has been in accumulation mode. The stock has been rising all year and the interview last week with Buffettt helped propel the stock higher. Still it is off its highs from earlier this year but not by much.

Put Selling Strategy For BK Stock

There is not a lot of volume in the options but the $30 put strike for November was trading as high as 28 cents on Friday which would be 1%. $30 seems a reasonable place to start Put Selling and the option increments are available by the dollar so this makes rolling down from $30 to $29 easy. The other thing about this bank that is interesting is that you could basically keep adding in capital to the put trade if you have to keep rolling down. We know from the 5 year chart there is a lot of support at $25.00 in BK Stock.

Put Selling Roll Down Strategy For BK Stock

Therefore if I was Put Selling 10 puts at $30 and I had to roll down to $29, I would probably add in 2 or 3 more puts to keep the roll down profitable and to allow me to roll down just one month out. Then if I had to roll down again, I would add another 2 or 3 naked puts to roll down to $28 and again stay within a month or so. I would keep doing this if necessary right down to $25. With a lot of support at $25, the roll downs would be highly profitable all the way down.

BK Stock chart

As well, if you look at the one year chart above you can see that that move from $25 to $31.00 has taken months. The stock from Feb through to July stayed in a very tight range between $27 to $29. While this is not really support, this bank would have to have something unforeseen happen to drop it through $27 to $29 overnight. In a regular decline a lot of investors would be sitting waiting for a chance to jump in at $27 to probably $28.

This means any decline should be slow and grinding. This is just perfect for rolling puts down. When a stock falls too fast and literally plunges, it is hard to roll puts down. Normally I have to use a different strategy for that type of drop. For BK Stock it seems like any weakness would allow for a gradual decline making rolling down profitable and suitable.

Other Stock and Option Strategies To Consider

There are a whole range of strategies an investor could consider with this stock. Even buying the stock on dips in small quantities and selling slightly out of the money covered calls 3 to 6 months out would make sense, especially if Buffettt is right and the stock continues to climb higher into 2014.

I would have no interest in naked calls or call credit spreads unless the stock exhibits definite signs of a prolonged pullback. Right now pullbacks are being bought by investors. I also would have no interest in buying options, even long options such as into January 2015. The January 2015 $30 call option is trading for $3.80 on Friday. That means I am paying out 12.6% in premium. Even if the stock moved to $35 by next year, selling puts monthly makes a lot more sense.

Buying Stock for Trades

The last strategy I want to comment on is how nicely this stock is set for short-term trades. Because the stock has been in an uptrend all year, each pull back of the stock the the Lower Bollinger Band has resulted in the stock pushing back up. This means buying the stock at the Lower Bollinger Band has resulted in superior returns, far in excess of just owning the stock from January 2013 to the present. Combine the stock trades, which I have marked below with red arrows, to Put Selling and you could probably generate 25% return easily.

Put Selling Buffettt’s Bank Part 1 – BK Stock – Final Word

The final word on this Warren Buffettt bank is while the bank is too small for my normal criteria, I see this bank as a challenge to my only small regional bank that I trade BBT Corp Stock. I will do a comparison look on the member site to see which one of these regional small banks I would be interested in. My choice for this bank would be the stock trades combined with Put Selling. The terrific thing about BK Stock pattern is even if I was wrong with my trade, bought the stock at the Lower Bollinger Band and the stock just kept falling, I can see a whole range of rescue strategies I could implement to keep the trade profitable in an pullback or actually even a bear market. Problem for me though is I like big cap stocks that will outlive me, my children and grand children. If I stock I own falls I like to know that I can put more capital to work in that stock through other option and stock strategies and keep the entire position profitable. I can see why Warren Buffettt likes Bank Of New York Mellon Stock – BK.

Next up is Goldman Sachs Stock: GS

Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.