Who would have thought given the Fed’s support programs, that Citigroup would in a death spiral akin to what we saw with AIG. And make no mistake, if the Citigroup shoe drops, through nationalization or bankruptcy, it may well cause further routs on the stock market.

Even the venerable Canadian banks, that many thought had sidestepped the global crisis, were sideswiped by the latest write downs from Toronto Dominion and Bank of Nova Scotia. With
perhaps more write downs to come from CIBC and Bank of Montreal.

It begs the question… have Canadian financials finally bottomed? We know, or at least are being told, that Canadian financial stocks have weathered the credit crisis in better shape than most other global financial institutions. Although many investors may be re-thinking that view.

In either case, there appear to be some interesting opportunities within the financial services sector. Bearing in mind, that the enhanced volatility that has gripped the entire market has left option premiums in the financial sector at record highs.

For example, options on Bank of Nova Scotia (TSX: BNS, recent price $31.25) are trading at 70% implied volatility. The company’s exposure to Latin America is the concern. Everyone recognizes that Latin America is behind in the credit crisis, but it will not be immune to it. The real risk is the lack of credible information as to the extent of bad loans in the region, and more importantly, uncertainty as to how Latin American governments will manage the crisis (i.e. Argentina nationalizing private pensions).

Having said that, BNS has a healthy balance sheet and there has been no mention that its $2.02 annual dividend will be cut. At current rates, that dividend provides a yield of 6.5%. So far, no Canadian bank has suggested that its dividend is at risk. Although the market certainly believes they are.

With that in mind, you might look at writing December 30 puts at $2.50 per share. If the shares are put to you, your net cost is $27.50 ($40 strike less $3.45 premium = $36.55 net cost), which assuming the dividend remains in place, would provide a yield of 7.3%.

You can find similar situations with other Canadian banks, which means that your real choice comes down to survival of the fittest.