“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, September 02, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy


"Trading Capital Management"

Option Trade – Royal Bank of Scotland Group PLC (NYSE: RBS) Calls

Tuesday, September 03, 2019

Execute a STRANGLE…..

** OPTION TRADE 1: Buy the RBS JAN 17 2020 5.000 CALL at approximately $0.25.

Place a high pre-determined sell at $1.00.

Do not include a protective stop loss until profit is obtained.

** OPTION TRADE 2: Buy the RBS JAN 17 2020 4.000 PUT at approximately $0.20.

Place a high pre-determined sell at $0.80.

Do not include a protective stop loss until profit is obtained.

Making the most out of the “Brexit,”or if you prefer the “no-deal Brexit” debacle with this strangle options trade.

A Brief Overview….. 

On October 31, the United Kingdom must decide whether it will leave the European Union with a deal or without a deal.

Boris Johnson, the new British Prime Minister, has already signaled a departure regardless of a deal. A no-deal Brexit could be a shock to the system for the U.K. and leave it without a trade agreement with its biggest trade partner. That would subject the U.K. to billions of pounds in fines.

Many believe this is factored into prices... They are probably right.

However, with decisions this momentous, there is always room for a reversal, a panic or nothing at all. Investors are a nervous bunch, and they tend to react irrationally.

And, one stock that will be in the firing line, and reacts dramatically to all sorts of news – good, bad or indifferent - will be Royal Bank of Scotland Group PLC (NYSE: RBS).

In this case I recommend a strangle where the expiry date takes into account when Brexit will take place. A strangle is when you take both sides of the play, a put and a call. If Brexit causes a panic, you should benefit from the put. If the decision is met with relief, you'll benefit from the call. If nothing happens... $0.45 is at risk. It's basically an all-or-nothing play.

A quick overview of a Strangle…..

The long strangle, also known as buy strangle or simply "strangle", is a neutral strategy in options trading that involve the simultaneous buying of a slightly out-of-the-money put and a slightly out-of-the-money call of the same underlying stock and expiration date.

About Royal Bank of Scotland Group…..

Royal Bank of Scotland Group is one of the largest British banks. The business model of the bank has changed significantly since the economic downturn. RBS has shrunk considerably in size - moving away from a business model that was operationally as well as geographically much more diversified and relied considerably on investment bank operations to one that depends almost completely on traditional loans-and-deposits banking.

Negative Sentiments…..

At this stage it appears that Britain’s banks face a hit of up 25% to their earnings if Britain crashes out of the European Union without a deal, according to analysts at Citigroup.

The economic slowdown that would result from a no-deal Brexit, as well as the likelihood of lower interest rates and borrowers defaulting on loans, would hit earnings per share by between 15 to 25%, the analysts at Citi wrote in the note published on Thursday.

Moving forward…..

Royal Bank of Scotland on Aug. 2 said deteriorating economic conditions before Brexit were likely to derail next year's profitability, and cost targets after it reported strong first-half results, including a 1.7 billion pound dividend.

RBS warned that in the first half of the year some of its consumers and businesses were struggling as the chances rise of a disorderly departure from the European Union.

The state-controlled bank said a tough outlook would make it "very unlikely" it would meet its target of achieving a 12% plus return on tangible equity - a measure of profitability.

RBS, which has undergone a major turnaround since a 45 billion pound bailout in the financial crisis a decade ago, said it would struggle to reduce its cost to income ratio to below 50% by 2020, although this remained its medium term goal.

Positive factors…..

RBS announced the 1.7 billion pound ($2.06 billion) windfall for investors after the sale of a stake in Saudi bank Alawwal helped to support a 48% increase in first-half pretax profits to 2.7 billion pounds.

The British government - which still owns 62% of the RBS - will receive 1 billion pounds.

RBS said its overall lending business remained healthy, but it reported an increase in bad loans of 182 million pounds for the first half compared with the previous year.

RBS also said there was a modest increase in default rates among personal banking customers, a decline in property valuations in the retail sector and large companies delaying financing due to Brexit uncertainty.

"There are some small signs of strain but at this point nothing we're particularly concerned about," CFO Katie Murray said.

RBS has been quite successful in reducing costs over the years. Stringent cost-cutting measures have helped the bank significantly improve its pre-tax margins.

RBS's operating margin has seen a much larger improvement from -32% in 2016 to more than 25% as of 2018. Over 2015-16, the bank's margins had been adversely impacted by one-time restructuring and litigation charges.

Given RBS's focus on its UK operations, its UK retail banking segment was responsible for 47% of total revenues in 2018.

Moreover, absence of litigation charges and stringent cost-cutting measures have helped RBS's UK Retail Banking pre-tax margin increase steadily from 24% in 2015 to around 39% in 2018.

Analysts opinions…..

Macquarie lowered shares of Royal Bank of Scotland Group (NYSE:RBS) from an outperform rating to a neutral rating in a report released on Wednesday, August 14th.

Several other equities analysts have recently commented on the company…..

  • Zacks Investment Research cut Royal Bank of Scotland Group from a “hold” rating to a “sell” rating in a research report on Wednesday, August 21st.
  • HSBC cut Royal Bank of Scotland Group from a “buy” rating to a “hold” rating in a research report on Thursday, August 15th.
  • Bank of America cut Royal Bank of Scotland Group from a “neutral” rating to an “underperform” rating in a research report on Tuesday, July 23rd.
  • Finally, ValuEngine cut Royal Bank of Scotland Group from a “sell” rating to a “strong sell” rating in a research report on Thursday, May 23rd.

Four equities research analysts have rated the stock with a sell rating, four have assigned a hold rating and three have issued a buy rating to the company’s stock. The stock presently has an average rating of “Hold” and a consensus price target of $6.25.


Royal Bank of Scotland Group has a market cap of $26.93 billion, a PE ratio of 9.33 and a beta of 1.11. The company has a quick ratio of 1.05, a current ratio of 1.05 and a debt-to-equity ratio of 0.21. Royal Bank of Scotland Group PLC has a 52-week low of $4.33 and a 52-week high of $7.31. The business has a 50-day moving average price of $5.16 and a 200 day moving average price of $6.00.