So, Wells Fargo’s stock went up and everyone is scurrying to see if now is the time to bet on bank stocks. Folks are not buying, yet, but, trading of “calls” was active in banks and other financials.
The point of the long term investor getting into the market at this point is to pick up good stocks cheap. It is to buy before the crowd gets excited and starts buying in droves.
Smart money has been buying calls on traditionally strong stocks for last months. It appears that after Wells Fargo’s stock went up that the hounds are on the scent of banks and other financials.
However, it appears as though no one is really ready to buy bank stocks right now for fear that the banks will have another round of bad news and drop further in price.
So, what do you do if you believe that the stocks of Wells Fargo or Bank of America or Citigroup or JPMorgan will recover and give you nice dividends and capital gains for years once the recession fades?
The first option, if you will pardon the pun, is to purchase a call option on a bank stock. Buy the right to buy the stock at a given price and if the market surges past that price you exercise the option and have an immediate appreciation of your stock and, hopefully, you have purchased an excellent long term bank stock at an excellent price.
The second option is not an option but a limited order. If you believe that Wells Fargo or any other financial will drop in price again you can simply place a limited order for the stock to be executed only if the price drops to your level.
In either case you will purchase the stock at something less than what you hope it will be in a few months. Then, if you have picked a strong company with good management in the new economic environment you will collect your dividends and watch your stock appreciate for years.
The general consensus seems to be that the financial sector is still risky so no one big is buying a lot. Also it appears that a lot of option trading is going on in the Select Sector Financial SPDR (XLF) which is a composite of 80 financials. With people looking to pick up gains on both puts and calls there obviously no consensus about where the market is going, yet.
If your interest is in long term, buy and hold, investments these next months will be great times to pick up good stocks at great prices. Getting back in before most of the market move has happened is the point of buying calls or placing limited market orders. The nice part about both strategies is that you need not sit at a trade station all day worrying when to pull the trigger. If a stock does not move up or down you don’t buy.
In fact, some folks will tell you that long term investors should probably only buy or sell with limited orders. You are going to be in a stock for a long time but there are ups and downs. There is no reason to jump the gun buying or selling and you do not need to watch a stock price all day long. Place a limited order and if the stock comes to you then buy or sell.