One of the most important sectors in the S&P 500 index is the financial sector. Over the course of my economic analyses, I have paid scant attention to the US banking industry for the simple fact that it has been a rock-solid component of the US economic engine. However, cracks are starting to appear in major US banking corporations across the nation, and the global economic rot is affecting major European banking organisations as well. The focus of this trading article will be on Deutsche Bank and the major US banks. The overall trend is bearish, which would appear to suggest placing put options on the stocks. However, a careful analysis of the fundamentals of the banking sector will clarify precisely which banks should be aligned with call options and which banks should be aligned with put options over the short-term.

Deutsche Bank Rocked by 5% Decline in Share Prices

2016 has not been a pleasant year for Deutsche Bank. The share price has plummeted by over 40% in 2016, and this week alone the bank has sustained heavy losses of 9.5% on Monday, 8 February and 5% on Tuesday, 9 February. Despite reassurances from the bank that it has sufficient cash reserves to make good on bond payments, investors are having none of it. The reality is that global economic weakness is like a noose around the neck of US and European financial institutions. As demand from the once invincible Chinese juggernaut has dried up, confidence in the global economy is following suit. Banks are the first line of defence and the face of the success or failure of a country.

When investors feel a lack of confidence in the performance of their country’s economy, this automatically reflects in the share price of the financial sector – the banks. Deutsche Bank was hammered in Q4, 2015 earnings. This was to be expected given the major selloffs in the Chinese equities markets and the collapse of crude oil and other commodities like copper. Exceptionally high levels of volatility have not been kind to the financial markets. Deutsche Bank has attempted to assuage investors by stating that it will have sufficient resources available to make payments on AT 1 coupons valued at €350 million within the next 80 days (30th of April 2016). So what is causing such uncertainty with investors with regards to Deutsche Bank stocks?

• Exposure to highly volatile commodity markets like oil, copper, molybdenum, iron ore and natural gas
• Exposure to energy companies with exceptionally high levels of debt that cannot be financed as a result of weak commodity prices
• The threat of a corporate takeover of Deutsche Bank owing to its low share price ($15.38 on the NYSE)
• Widespread concern about Deutsche Bank’s bond and share market have resurfaced, and it is the private sector that will bear the brunt in the event of a bailout – not the government

The Takeaway:

There is way too much uncertainty, volatility and fear in Europe with regards to Deutsche Bank right now. My suggestion for binary option traders is to place put options on Deutsche Bank stock for the remainder of this week. Bank shares across Europe have plunged 22% in 2016 to date. There are notable concerns that an unwelcome encore of the 2007/2008 financial crisis could resurface owing to a resurgence in bank weakness.

US banking stocks – call options or put options?

If the problems were only limited to Europe, the situation would be less worrisome. However the world’s #1 biggest economy – the USA – is in trouble too. According to Bank of America Merrill Lynch, there has been a 4.2% contraction in quarterly profits among US financial corporations. They are concerns among many economic strategists that the US economy will enter recession territory in 2016, on the back of a commodities market meltdown, weakness in China, and a sharp decline in profits for the US financial sector. Not all US banks are underperforming, but the vast majority of them are coming under increasing pressure as a result of global economic weakness. The S&P 500 index features 90 financial stocks, with just 8 of them ending in the black for 2016. That means that over 91% of US financial stocks on the S&P 500 index have finished in the red for the year to date. Let’s take a look at some of the banks that have made it onto the radar and how you should trade them in the form of binary options.

*The above graphic represents the Year to Date performance of the major US banks

Bank of America

Bank of America is currently trading around 27% lower in 2016, and the current share price is $12.20 for a decline of 0.57%. The company has a market capitalisation of $134.42 billion and a price/earnings ratio of 9.89. At its current price, there is significant value in Bank of America, despite global economic sentiment. This stock is a call option in my estimation as a result of high growth in EPS, high revenue growth and a strong increase in net income. The company also has expanding profit margins, despite the plunging share price that we have seen in 2016.

Morgan Stanley

As one of the biggest names in the business, Morgan Stanley has also been ravaged in 2016. This financial institution’s share price has plunged by 28% in 2016. How does it rate as an investment? At its current trading price of $22.94, Morgan Stanley has a market capitalisation of $47.15 billion, a price/earnings ratio of 8.37, and an earnings per share of 2.97. The stock has a 52-week trading range on the low end of $22.32 and $41.04 on the upper end. The stock, like Bank of America is rated as a buy for binary options trading. The reason for this is largely value based. The EPS growth has been solid as has net income growth. If we overlook the recent performance of the stock, there is certainly value to be had in Morgan Stanley.

Citigroup Inc

This stock has plunged by 26.15% recently, and at its current price of $37.52 per share and a market capitalisation of $118.74 billion, the stock is a hold according to most analysts. Therefore, as a binary option trader – do nothing right now. There is mixed sentiment about how you should trade the stock, given the strengths such as net income growth, revenue growth and high valuations, but the weaknesses include poor performance of the stock and low profit margins. I’m leaning towards put options this week.

Goldman Sachs Group

The Goldman Sachs Group Inc trading as GS on the NYSE is priced at $148.25 per share with a market capitalisation of $63.66 billion, a yield of 1.75% and a price/earnings ratio of 10.28. The stock is also trading near its 52-week low price of $145.25, and its 52-week high is $218.77. The stock is either a sell or hold, depending on how bearish your opinion of the company is. There is some strength with the stock including a strong return on equity, but its weaknesses include poor performance and slack earnings per share growth. For these reasons, I am tending towards put options on the stock.