In the past four days USB has risen and is again approaching the $33.99 swing high. A persistent break above that level would mean that the uptrend from $28.58 on June 5 is still in place.
Although the price has consistently set higher highs this week, the highs have been followed by declines. And the rise has been accompanied by declining volume, never a bullish sign.
US Bancorp is the fifth largest commercial bank in the United States by assets. The Minneapolis, Minnesota company has branches in 25 states.
Big banks these days tend to be grouped into the greater evils and the lesser evils. My sense is that US Bancorp stands among the lesser evils in the public mind, although none of the big players has come through the past few years with its reputation unscathed.
Analysts have little enthusiasm for USB. The enthusiasm index is negative 19%, down from negative 12% a month earlier.
And yet, Zacks today, among their picks published for non-subscribers, named USB as its growth and income stock of the day, an opinion well worth listening to. (I haven't read the Zacks analysis yet, in order to keep my own analysis independent. You can read it here.)
The stock's movement over the past two months has shown trader enthusiasm for USB's prospects.
And the financials give a certain backing to the idea that USB is a bank capable of ginning up some enthusiasm.
US Bancorp reports return on equity of 16% with long-term debt standing at 85% of equity.
After hitting a recession low in 2009, earnings have risen spectacularly the past two years, and quarterly earnings have shown steady increases in profit stretching back into 2010.
Of the last 12 quarters, 11 showed upside earnings surprises, and only one, back in 2010, surprised to the downside.
Institutions own 68% of shares, and the price has been bid up quite a bit, so that it takes $3.21 in shares to control a dollar in sales.
USB on average trades 11.1 million shares a day, sufficient to support a good selection of option strike prices with high open interest and narrow bid/ask spreads.
Implied volatility stands at 22%, near the six-month low. It has fallen the past two days. Options are pricing in confidence that 68.2% of trades will fall between $31.55 and $35.73 over the next month, for a maximum gain or loss of 6%.
Options are trading at less than 30% of their five-day average volume, with calls at 26% and puts at 16%.
We all have a tendency to translate "lack of enthusiasm" to mean "falling prices". Looking at the options data, and I think the phrase in the case of USB is best translated as "we're so bored". This is one of the most ho-hum set of figures I've encountered for awhile.
USB is trading within today's fair-price zone, which ranges from $33.57 to $33.73 and encompasses 68.2% of trades surrounding the most-traded price, $33.62. The five-day fair-price zone runs from $33.16 to $33.69, with a most-traded price of $33.41.
US Bancorp next publishes earnings on Oct. 15. The stock goes ex-dividend tomorrow, July 27, for a quarterly payout yielding 2.32% annualized.
I noted above that Zacks considers USB to be a growth and income play. That income part has an impact on my strategy. To capture the dividend, I need to own shares. But that reduces my profit on any calls I sell for income against those shares, as compared to an all-options strategy, such as a diagonal spread.
Also, being short a call as the ex-div date approaches brings the danger of that call being assigned early by its owner, who is obtaining the shares more cheaply and therefore increasing his or her dividend yield.
Decision for my account: I'm ignoring the analysts. There's enough counter-evidence strewn about that casts doubt in my mind on the value of their conclusions. I like the financials, and the high debt level isn't awful for a banking company.
The dividend complicates the strategy, but it's manageable, thanks to the calendar. Here's what I'm doing.
The falling volume on the chart is problematic for USB as a momentum play. But I'm adopting a different strategy that allows for profit even if traders are losing interest.
I've bought shares in USB today. I'll collect the dividend as the stock goes ex-div tomorrow. The quarterly yield is 0.58%. Tomorrow or Friday, I'll then sell a covered call against the shares, for an estimated yield of 1.2%. And as a result, I get a yield in August of 1.78%. Not shabby at all.
I'll still own the shares, and so I'll be able to continue to sell covered calls against them, increasing my yield further. And I will have avoided the risk of assignment in the run-up to the ex-div date.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.