U.S. Bancorp has quietly been showing an improvement in relative strength in the last month. So let's consider using a simple long strategy using call options in USB stock.
Earnings per share at the superregional lender dropped 11% in Q3 from $1.12 per share a year ago to $1.05, but were slightly above analyst expectations.
Meanwhile, USB stock is above the rising 21-day exponential moving average, as well as the 50- and 200-day simple moving averages. The 200-day line is still sloping lower, but the 50-day moving average is showing signs of bottoming out.
Investors who think USB stock will continue to rally and don't want to risk significant capital can use long call options rather than buy the stock outright. This can be a good way to protect precious capital in these volatile markets.
USB Stock Today: Why A Call Now?
A call option is a contract between a buyer and seller. The contract gives the buyer the right to purchase a certain stock at a certain price (known as the strike price) up until a certain date (expiration date).
One of the benefits of call options is that they provide leverage. And of course, this can be both a good and a bad thing.
Assuming an investor wanted to buy 100 shares of USB stock, they would have to invest around $3,760 at the current price.
Instead, the investor could gain a similar exposure using a fraction of the capital by buying a call option.
One call option gives the investor exposure to 100 shares.
One Trade Advantage: The Cost
If an investor were to buy one USB 35-strike call option expiring on March 15 next year, he or she would only need to invest around $435 per option contract, based on recent trading, rather than $3,760.
The break-even price for this call option is equal to the strike price plus the premium paid, which would make the break-even price 39.35 per share.
The most the trade can lose? The premium paid of $435, which would occur if USB finished below 35 on March 15. However, if USB stock shoots higher, the upside is unlimited.
Using options in this way can be a great way to gain exposure to a stock without risking as much capital as would be required to buy the stock outright.
How To Lower Risk
Savvy traders can further reduce the risk by selling an out-of-the-money call, turning the trade into a bull call spread.
For example, selling the March 15, 45-strike call would reduce the trade cost by around $50 but would also limit the upside above 45.
A stop loss could be set if USB drops 8% from the entry point.
According to IBD Stock Checkup, USB stock ranked 3rd in its group and has a Composite Rating of 66, and EPS Rating of 56 and a Relative Strength Rating of 52.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
