As we approach the 4^th and final quarter of 2012 coupled with the Bernanke floor thanks to the unlimited buying of mortgage backed securities banks like JP Morgan (JPM, quote), Wells Fargo (WFC, quote) and Bank of America (BAC, quote) should do well especially with large funds chasing for performance going into year end.The FMOC’s commitment to keep rates low for extended period with a new target timeframe of mid-2015 should provide low mortgage rates for some time.

Instead of buying one or two banks we found the Financial Select Sector SPDR Fund (XLF, quote) ETF to be in the top 5 most active ETFs for the last several sessions since the announcement of QE3.  The ETF seeks  to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in The Financial Select Sector Index. With all 3 names we like in the top 5 holdings:

WFC       Wells Fargo & Co

BRK.B    Berkshire Hathaway Inc Class B

JPM       JPMorgan Chase & Co

C             Citigroup Inc

BAC        Bank of America Corporation

The Financial Select Sector SPDR Fund should benefit from QE3 as continued low mortgage rates remain low. One other affect that might be over looked is those home owners who filed bankruptcy because of the 2008 and 2009 crisis will become eligible once again for mortgages after 3 years of discharge and a positive credit history since the discharge.  This could bring more buyer into the housing market and in turn help banks not only to off load the foreclosures but generate new revenue.

Financial Select Sector SPDR Bottom Line:

Consider looking into the Financial Select Sector SPDR – XLF by taking advantage of the option market.  Options help define and minimize risk as well allow for a leverage move.  At CurveAheadMarketStrategies.com we are looking at fairly advance trade so we going to break it down for you.

Consider selling a vertical put with the purchase of directional call option buy.

The vertical put will allow the position to make money as the Financial Select Sector SPDR moves higher while limiting any downside losses. The buying of the call option will allow for the position to participate to any large move made by the Financial Select Sector SPDR.

Since we are looking for the large funds to chance this name we want to provide enough time for the thesis to play out, so we are looking out the December expiration.

Consider the following position for a cost of $0.01.  If the Financial Select Sector SPDR falls the position continues to make money until the Financial Select Sector SPDR falls to $14.99. Max profit is unlimited because of the upside call option and the position’s maximum loss is $199 plus fees and commissions. Remember options posse a significant risk as all investing does and readers should consult their broker with any questions before placing any trade.

Buy 1  Dec 13 Put  for $0.30 and sell 1 Dec 15 put for $0.08

Buy 1 DEC 17 Call for $0.23