2 Bank Stocks With Options at a Bargain

KeyCorp and Royal Bank of Canada are just off historically bullish moving averages

Jun 29, 2017 at 12:49 PM
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Most bank stocks are trading higher today, as speculators cheer the latest Fed stress test results and capital return plans. Among them is KeyCorp (NYSE:KEY) stock, which is 1% higher at $18.56, after the firm said it hopes to buy back up to $800 million KEY shares and hiked its quarterly dividend. What's more, KEY stock just sent up a "buy" signal on the charts, as did its neighbor to the north, Royal Bank of Canada (NYSE:RY).  Below, we'll talk about why now may be a good time to scoop up short-term options on KEY and RY stocks.

KEY Stock Could Be Headed for New Highs

KEY stock recently pulled back to its 160-day moving average, following a lengthy period above the trendline. In the past, these signals have marked short-term buying opportunities. According to Schaeffer's Senior Quantitative Analyst Rocky White, after KeyCorp's last three pullbacks to this trendline, the stock was higher one week later each time. One month after a signal, KEY stock was in the black 67% of the time, averaging a gain of 4.41%.

From KEY's current perch, a 4.41% gain would push the shares above recent resistance in the $19-$19.50 area, which has capped the stock's rally attempts since late 2016. More specifically, a similar gain over the next month would put KEY stock at $19.75 -- in territory not charted since 2008.

keycorp stock chart key stock

A round of upgrades could also help KeyCorp stock move higher. Despite rallying more than 72% over the past year, KEY sports just seven "buy" or better endorsements, compared to 10 "hold" or worse ratings.

Options traders expecting another short-term burst for KEY can pick up contracts at a relative discount. The stock's Schaeffer's Volatility Index (SVI) of 25% is higher than just 18% of all others from the past year, indicating KeyCorp's near-term options are attractively priced right now, from a historical volatility standpoint. Meanwhile, KEY's lofty Schaeffer's Volatility Scorecard (SVS) of 82 indicates the shares have made bigger moves on the charts than options traders expected during the past year -- a boon for premium buyers.

RY Stock Testing Pair of Trendlines

Seeing as the Royal Bank of Canada wasn't subject to American stress tests, the shares were last seen 0.5% lower at $72.57, succumbing to broad-market headwinds. However, the stock recently pulled back to a pair of historically bullish trendlines, which could mean RY shares will be headed higher soon.

According to data from White, RY is within one standard deviation of both its 160-day and 200-day moving averages. Following Royal Bank of Canada's last seven pullbacks to the 160-day, the stock was up an average of 2.39% one month later, with a 67% positive rate. And one month after its last four pullbacks to the 200-day trendline, RY stock was in the black 75% of the time, with an average gain of 2.45%.

royal bank of canada stock ry stock chart

Royal Bank of Canada stock has advanced more than 22% in the past 12 months, and is now within a chip-shot of February's highs just above $76. Further, the $76 region marked RY stock's peak in late 2014. However, a short squeeze could put RY stock over the top, should these bears ditch their losing positions. Short interest represents nearly 12 sessions' worth of pent-up buying demand, at the security's average daily trading volume. Plus, there's plenty of room for upgrades to lure more buyers to the table, with just half of the analysts following Royal Bank of Canada offering up a "buy" or better endorsement.

As with KEY, options traders expecting higher highs for RY stock can scoop up near-term contracts at a relative bargain. The equity's SVI of 14% is lower than 93% of all others from the past year, pointing to cheap near-term premiums, from a historical volatility standpoint. And Royal Bank of Canada stock's SVS of 75 indicates the shares have exceeded options traders' volatility expectations during the past year.

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