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When I arrived in Canada in 1970, one of the first investment maxims I was taught by the old pros was, "Put your money in the bank stocks, not the banks."
The point was I would see far better returns holding bank shares than I would earning interest in a savings account.
As this bull market rages on with the S&P 500 about 215% higher than its early 2009 low, I want to update the maxim. While this bull market continues, I say, buy the brokerage stocks.
As the market trends higher, investors gain more confidence. With increased confidence, they invest and trade more. As the market rises, there is more trading equity in their accounts and they can make bigger bets. Brokers benefit from this virtuous cycle.
The ability to trade from virtually any mobile platform, anytime, anywhere is another reason trading activity at many online brokers is rising.
One of the most innovative online brokers is Interactive Brokers (NASDAQ: IBKR). The company was rated highest in Barron's survey of the best online brokerage for the third straight year. Ranked on categories such as trading cost, portfolio analysis and trading platform usability, the company scored 36.7 out of a possible 40 points in the 2014 survey, beating out such well-known names as TD Ameritrade (NYSE: AMTD) and TradeStation.
Interactive Brokers targets two main groups: active traders and those who trade international markets. With over $5 billion in equity capital, the company operates in more than 100 markets in 24 countries. Although the company has several sources of revenue, 97% of current revenue comes from brokerage activities.
Frequent traders can purchase shares with commissions as low as $0.005 a share, or $0.50 for a hundred shares (although there is a $1 minimum on a trade). That means day traders can make numerous trades per day without worrying about commissions eating up trading profits. And the company's Trader Workstation (TWS) platform provides instant execution feedback, which is vital to frequent traders.
True, the brokerage is not for everyone. It requires a minimum balance of $10,000 to open an account. The company supplies little research, and if you don't trade frequently you will be penalized with inactivity fees.
Despite these negatives, the company is clearly reaching its active trader target market. The company reported that a key industry metric called DARTS (Daily Average Revenue Trades) was up 9% year over year in February to 633,000. The brokerage also increased its number of trading accounts 17% in the past year to 290,000.
This increased trading activity is expected to help boost revenue 33% in 2015 to $1.39 billion. Analysts estimate full-year earnings will soar more than 140% to $1.23 per share.
The stock is trading just below its multiyear high at $33 and is up about 150% since its low near $13, made in late 2012.
Between October 2010 and October 2013, IBKR consolidated between roughly $13 and $19. During that three-year period, it tested major support three separate times.
The final test was in April 2013, when shares bottomed below $14. From there, they trended strongly higher, hitting round number resistance at $25 by December of that year.
That resistance level proved to be a formidable one. After probing $25 for five straight weeks, IBKR fell sharply in early 2014. Breaking the uptrend line, they pulled back to just over $20 in early February, rallied a bit and again fell to $20 support in April of that year.
It's from there that the current trendline can be drawn. Forming an ascending triangle, the stock finally pushed through $25 resistance in September after a nine-month consolidation.
The breakout was short-lived, and IBKR retreated well into the base. Significantly, however, shares held at the trendline and rallied, testing the $30 level in December. In January, the stock pulled back to just over $25, but again successfully held the trendline. The long lower shadow of the early January candle showed buying interest at that level.
After this successful trendline test, shares again rallied, moving above $32 in early February and then trading in a very narrow range.
While trendline support does not intersect with the chart until $27, there should be good lateral support just under $30 where the shares consolidated in late 2014. I am, therefore, setting my stop-loss at $29.79.
Since IBKR is now trading near an all-time high, there is no overhead resistance. But it does show a pattern of pausing at round numbers. So I am setting my target just below the next one at $40.
Recommended Trade Setup:
-- Buy IBKR at the market price
-- Set stop-loss at $29.79
-- Set price target at $37.95 for a potential 17% gain by mid-2015
Amplify Your Gains: Generate 104% From a 17% Stock Move
Using options, we can amplify IBKR's potential 17% move into a 104% gain. Specifically, we recommend buying IBKR Sep 30 Calls for $3.90 or less.
This call option has a delta of 70, which means it will move roughly $0.70 for every dollar that IBKR moves, but it costs a fraction of the price of the stock.
The trade breaks even at $33.90 ($30 strike price plus $3.90 options premium), which is 5% above current prices.
If IBKR hits Melvin's upside target of $37.95, the call options will be worth at least $7.95 ($37.95 target minus $30 strike price). Once you enter the trade, place a good 'til cancelled (GTC) order to sell your calls at that price.
Profit Amplifying Trade Setup:
-- Buy IBKR Sep 30 Calls for $3.90 or less
-- Set stop-loss at $2.50
-- Set price target at $7.95 for a potential 104% gain in 6.5 months
If learning how to make profit amplifying gains like this on your own interests you, I can't urge you enough to watch this interview. In it, one of America's top options traders reveals his strategy on camera for the first time. It's a technique that allowed him to retire wealthy at the age of 23 and continues to pay for his affluent lifestyle to this day.
Click here to watch the interview now.
-- Profitable Trading Staff
As I'm sure you are all aware, stock prices have been unusually volatile lately...