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I am buying Doug Kass’ Case for Schwab


Real money writer Doug Kass mentioned several times this week that he is building a position in the Charles Schwab Group (SCHW) . Shares have fallen about 30% since the explosion earlier this month at Silicon Valley Bank (SIVB) .

I think Dougie is making more than a reasonable call here. I also bought initial shares of this famous financial services and brokerage name this week. However, I have done so through a two-step options process that provides solid protection on the downside and will deliver teen returns over the next six months even if the stock goes down. The coupon is slightly down from the current trading level.

One thing I like about the management of this company is that they are stepping up and giving the stock a confidence vote during the recent drop. Insiders have bought a total of more than $6 million in shares since the collapse of SVB. The difference between Schwab and Silicon Valley funding sources determines why the former still works and the latter doesn’t. Silicon Valley is proud to boast that it is a commercial bank holding 44% of the healthcare and technology services backed by venture capital in its initial public offerings in 2022. As a result, the proceeds from the IPOs went to Silicon Valley Bank. nearly quadrupled in just four years. I believe the company has practiced extremely poor risk management, especially when it comes to matching the maturity of its assets and liabilities. Something that eventually led to the collapse of the 16th largest bank in terms of deposits.

With its origins as a discount broker, Schwab primarily serves retail clients, unlike Silicon Valley, a bank that serves institutional clients such as technology, healthcare, wine and private banking with regular account balances in the millions, much higher than the $250,000 insured by the Federal Deposit Insurance Corporation — despite the additional support of federal after the incident. In a way, Charles Schwab benefited from the collapse of the Silicon Valley Bank as the bank saw $16.5 billion in new net worth inflows in the week ended Jan. March 17.

Schwab’s Ready For Sale, or AFS, portfolio has likely enjoyed considerable success since 2022. It remains in a well-liquid position and has always had access to the Term Funding Program. bank term recently established by the Federal Reserve, in response to this banking crisis, if necessary. JP Morgan, Barclays, and Citigroup have all reiterated their “Buy” and “Outperform” ratings on Schwab this week, and with the recent drop, the stock also offers a yield close to 2%.

Selection strategy:

Here’s how I was able to open a small position in SCHW through covered buy orders: Using the $50 call strike price in September (about 6% below the current trade of the SCHW). shares), create a secured buy order with a net debit of $43 to $43.20 in stock range (net share price – option premium). This strategy, which includes dividend payouts, only protects against an 18% downside risk, with slightly lower upside potential, even if the stock falls 6% over the next half year. For those who want to protect this position from major financial contagion, it is also advisable to buy a $30 deposit in September between $1.25 and $1.35. This will reduce your profits a bit but provide protection against the same scenario as 2008.

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