Attractive picks for the financial and retail sectors.

Posted by Jack Haddad on March 9, 2008 at 7:34 pm

The retail and financial sectors have again become attractive. Some brokerage firms and banks have forsaken the entire 30% run-up that they have rallied in the last 2 months.

Subprime writedowns offer investors a rare opportunity to buy MS, a high-caliber brokerage at just 1.2x tangible book value. Looking at the premium of March strike 40 calls and puts. I favor the put at 2.40/contract versus the calls which is paying only 1.20/contract. I recommend writing (sell to open) the March strike 40 puts at 2.40 without purchasing the underlying shares. The 2.40 premium per contract gives you a 2.40 downside hedge from the current share price of 39.89. Again, this puts is termed “at the money” since the strike equals the share price. If, in two weeks, the ahres are below 37.60, close out the puts (Buy to cover) and buy the shares. You would have pocketed the entire premium at 2.40/contract and would have an opportunity at buying the shares lower than theyre currently today.

LEH is a little pricier, but its earnings are going to be more predictable than most of its ilk. The shares are trading at 46.50 as oflast Friday. I recommend buying the shares and hedge them with the March strike 45 calls that are paying 3.50/contract. This premium give you an intrinsic value of 1.75/contract should the shares trade above 45 in two weeks or 1.75 hedge per contract should the shares be below 45. Either direction is attractive considering the recent pullbackon the shares.

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