Could BCE be the catalyst?

When it comes to the financial sector, I have been on both sides of the fence. Poor judgment in predicting resiliency within the Canadian banks. At least from a timing perspective. Buffered by some short term bearish calls on the sector – see June 7th blog; Bleeding Oil.

Here’s the bottom line! Banks will return to health, and credit conditions will ease. They have to. Without a healthy financial sector, you cannot have a robust economy.

The trick for traders is timing. And that depends on two factors: 1) finding the point at which sentiment hits rock bottom and 2) finding a catalyst to spark the system.

The rock bottom scenario seems appropriate as banks lead the sell-off in Canadian stocks. The catalyst may be the BCE deal. With the decision by the Supreme Court of Canada to allow the deal to move forward, we have lit a burner under the catalyst.

Whether it flies will depend on the participating banks standing by their original commitments to finance the buyout. On that front… so far so good!

Still, this is not a done deal. Considering the short time line, should the participating banks drag their heels, it would by default, scuttle the deal. Money on the table will go a long way to easing concern among investors.

Having said that, the odds favor a successful conclusion to the deal. Which is to say, the participating banks will stand by their commitments. And if the buyout price remains at, or close to the original deal, we have our catalyst.

I say that, because by any measure, this is a significant buyout. A successful close will provide evidence to the market, that credit conditions are easing. Effectively removing one of the biggest anchors weighing on the financial sector.

You can get a decent bounce if you combine a washed out sector with a catalyst. Combine that scenario with the leverage and limited risk of options, and the trade is compelling. Using say, the January 66 calls on Toronto Dominion (TSX: TD, recent price $65.05) which closed on Friday at $4.20 per share. Perhaps the Bank of Nova Scotia (TSX: BNS, recent price $49.62) January 50 calls at $2.80 or Royal Bank (TSX: RY, recent price $47.60) January 48 calls at $3.30.