A year ago, chaos engulfed the banking world. Silicon Valley Bank had failed, and they had no one to blame but themselves. I drafted a short note detailing how this chaos was driving bank customers away from smaller regional players and toward the major banks. The big banks were declared the victors in this chaos at the expense of the regional ones, but they still suffered significant losses. Haircuts ranging from 11% to 40% were given across the board. At that point, I projected that if they were to return to pre-SVB collapse prices, there would be potential returns of 62% with my basket of LEAPs. This projection seemed reasonable given their status as the beneficiaries of the upheaval. The table from March 21, 2023, is provided below:
A year later, the underlying stocks have all risen anywhere from 3% to 53%. This has been outstanding for the trade I modeled. The options have appreciated even more than the underlying. With nearly one year remaining on the contracts, we are seeing an 80% return. (Data points were collected over the weekend, prior to this morning's market opening).
Not a bad outcome! We have achieved returns higher than expected in about half the time I had hoped for. Now the question becomes: do we sell here or let it ride? With a year under our belts, the taxable gains are now long-term, removing that consideration. That means it comes down to our expectations for the next 9-10 months. Do we anticipate further gains? Do we expect things to decay, or will they stagnate? I'm not an expert in this sector, so the first thing I do is ask, 'What do professional investors think?'
Below is a chart of the consensus 12-month price targets for the underlying stocks as projected by professional analysts. The chart also indicates how far off those targets are from the current trading price.
Basically, things are around fair value/flat according to the professional analysts. If you agree with them, then we are in a position of "Theta Decay," where our options will lose value over time, but the stock likely won’t be moving upwards to give us compensatory or outsized gains. In that case, the wise move is to sell now.
Another thing to consider is the projected growth and scrutinize each company individually. Perhaps some have reached their peak, but others show promise in the short term. Maybe you want to exercise an option on one company and buy the stocks, so why not hold onto it? This can sometimes be the wisest course of action in a taxable account if you have the funds to cover. You can defer those capital gains indefinitely. So pick your winners if you intend to hold any of these for the long term; otherwise, in my opinion, it's time to call it a day. I structured this trade as "buy the sector," so I'll consider exiting it as "sell the sector."
Bank trade, you've been good to us. Achieving an 80% return in a year and four days is more than satisfactory. As always, take the time to think this through and decide for yourselves what you believe is best. I'm going to mark this as a closed trade at +80% on the scoreboard.
Happy investing!
S.