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Two Ways To Play: Who Cut the Dividend?


Strengthen your portfolio in good times and bad.

According to Bloomberg, derivatives strategists at Deutsche Bank say option prices for Goldman Sachs (GS), Citigroup (C), and Bank of America (BAC) are foreshadowing "dramatic" dividend cuts.

Strategists Scott Weiner and Chris Hauck wrote in a note that the option market is pricing in a cut for "virtually every major U.S. financial services company." Goldman may cut its dividend by 26 cents to 9 cents, Bank of America may cut theirs by the same amount to 38 cents and Citigroup may reduce its dividend by 23 cents to 9 cents.

Their analysis involved comparing prices for puts and calls expiring in January and the dividend implied by those contracts with current prices for puts and calls. The discrepancy between those derivatives, assuming a constant risk-free rate, are used to extrapolate the implied dividend.

From the Bull Pen: We've mentioned the non-credit plays in the financial sector previously: MasterCard (MA) and Visa (V). Bulls expect these stocks to continue to outperform.

From the Bear Cave: Bears expect significant selling pressure should the investment banks cut their dividends. Playing the downside in the investment banks or the financial ETF (XLF) are all options.
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No positions in stocks mentioned.

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