One of the most important sectors in the S&P 500 index is the financial sector. Over the course of my economic analyses, I have paid scant attention to the US banking industry for the simple fact that it has been a rock-solid component of the US economic engine. However, cracks are starting to appear in major US banking corporations across the nation, and the global economic rot is affecting major European banking organisations as well. The focus of this trading article will be on Deutsche Bank and the major US banks. The overall trend is bearish, which would appear to suggest placing put options on the stocks. However, a careful analysis of the fundamentals of the banking sector will clarify precisely which banks should be aligned with call options and which banks should be aligned with put options over the short-term.

Deutsche Bank Rocked by 5% Decline in Share Prices

2016 has not been a pleasant year for Deutsche Bank. The share price has plummeted by over 40% in 2016, and this week alone the bank has sustained heavy losses of 9.5% on Monday, 8 February and 5% on Tuesday, 9 February. Despite reassurances from the bank that it has sufficient cash reserves to make good on bond payments, investors are having none of it. The reality is that global economic weakness is like a noose around the neck of US and European financial institutions. As demand from the once invincible Chinese juggernaut has dried up, confidence in the global economy is following suit. Banks are the first line of defence and the face of the success or failure of a country.

When investors feel a lack of confidence in the performance of their country’s economy, this automatically reflects in the share price of the financial sector – the banks. Deutsche Bank was hammered in Q4, 2015 earnings. This was to be expected given the major selloffs in the Chinese equities markets and the collapse of crude oil and other commodities like copper. Exceptionally high levels of volatility have not been kind to the financial markets. Deutsche Bank has attempted to assuage investors by stating that it will have sufficient resources available to make payments on AT 1 coupons valued at €350 million within the next 80 days (30th of April 2016). So what is causing such uncertainty with investors with regards to Deutsche Bank stocks?