Boy, do I have a good freebie for you this week…
Last week, I had lunch with two folks who are dependent on brokerage commissions from institutional investors for their business—they sell research services that are paid for in what are known as soft dollars.
A hedge fund makes a trade and the hedge fund gets charged a commission. Some of that commission is rebated in the form of soft dollars, which the hedge fund can use to buy services (through the aforementioned broker) such as research.
These two people—an economist and a Fed watcher—are canaries in the proverbial coal mine on commissions and trading.
What are they telling us? Both are with firms that do great work and business is solid—but not so much for their competitors. The Street is looking at reduced trading volumes and commissions.
Time to sell the brokers, right?
Not so fast…
Wall Street tends to lump companies together—needlessly, lazily—and not all brokers are created equal. So while the sector is down, expect a broker or two to have upside surprises in their earnings.
One is Charles Schwab & Company (SCHW). Earnings come out this Thursday and I expect them to meet or beat lowered expectations for the sector.
Schwab owns OptionsXpress (the online broker I use) and has been increasingly aggressive in its service offers to Boomers, retirees, and whoever has a chunk of change to invest carefully.
While they need those commissions coming in, assets under management are quite important and—if they grew meaningfully in the first quarter—have the potential to move the stock.
What to do?
The best position is to buy the shares and sell an in-the-money or at-the-money call.
As I write this, if you took this approach and bought the shares in the $26.60 range, and sold the April 26 call expiring this Friday, you’d net $40 or so per 100 shares if you’re called out, or reduce your cost basis to just above $25 if you aren’t called out.
If you’re on the aggressive side and $40 sounds too little for you, consider this: $40 times 52 (the number of weeks in a year) equals $2,080. Not a bad annualized return, 78.2%.
Think about it…
(Michael Shulman does not own nor trade shares in SCHW)