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Why Small Banks Rock (and Big Banks Don't)

Why smaller banks like USB are poised to outshine mega-banks like JPM and C

by 6/7/2012 7:40:39 AM
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When I was in New York last week, I did a few different videos with the always-entertaining Jeff Macke of Yahoo! Finance. In this one, embedded below, we discuss why big banks could still be in trouble. Sure, they've underperformed recently, but should some real trouble begin to brew, we don't think all the bad news is priced into the names. In other words, the risk to the downside could still be very profitable, should you play it right.

Specifically, a name like JPMorgan Chase & Co. (JPM) amazed us recently with how much the implied volatility on its options came in. Does anyone really know if the company is out of the woods yet? We sure don't think so, and as Jeff mentioned, not even JPM probably knows how much trouble could still be out there for them. All of this makes playing options on the "cheap" a very smart way to hedge your portfolio, should more trouble arise.

Lastly, a way we are playing this sector is by buying calls on the smaller regional banks like U.S. Bancorp (USB), which have held up well, while buying puts on the big mega-banks like Citigroup Inc. (C) and JPM. This is a nice way to hedge yourself and profit from potential summer volatility.

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