Trade of the Day: Royal Bank of Scotland (RBS)

If you could name a winner in today’s Goldman Sachs’ fiasco it might just be the Royal Bank of Scotland (RBS). Severely beaten down in the credit crisis, the stock has been slowly rebounding off a double bottom. (See daily chart below.)

And the picture is getting even rosier for the bagpipers. Today, not only did the bank receive price target increases by both Morgan Stanley and Bank of America/Merrill Lynch who said that it sees the company turning a profit this year and doubling in value over the next two years, it also benefited from holding ABN Amro, a victim in the Goldman fraud. Who would have thought an acquisition that nearly ruined the bank during the credit crisis two years ago requiring the largest government bailout in history would be an asset today?

Today’s share price is the level-water mark for the British government who said that it’s in no rush to sell its 84% stake in the bank. And why should they? With positive comments from major investment houses and a compelling stock chart, I wouldn’t sell, either.

A doubling of the current $15 price gives a $30 target, the stock’s pre-crash price. This is not an unreasonable goal considering that the stock debuted here as an ADR (American Depository Receipt) in 2007 at $70.

Options plays
The stock is optionable. Nov 20 calls are currently priced around 40 cents per contract and might make an attractive, inexpensive mad money bet. The Nov 17.5 call is a less risky bet but you’ll pay more for it.

A more conservative play would be to write out of the money covered calls as the stock rises. You could also sell an at the money bull-put credit spread and use the credit you receive to buy long-term calls. [Note that options plays are legal in retirement accounts, but you must be cleared to trade them by your broker meaning that you had better know what you’re doing.]

Every cloud has a silver lining; you just need to know where to look for it. Happy haggis!

RBS Chart 4-16-10

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