Higher interest rates are setting up to be one of the major market themes of 2015. Global rates are surging, and despite the fact that the International Monetary Fund (IMF) urged the Federal Reserve to hold off on increasing the fed funds rates, investors remain on edge.

This is wreaking havoc on the bond market, sending prices plummeting as investors sell bonds with lower fixed rates. The iShares 20+ Year Treasury Bond ETF (NYSE: TLT) has lost more than 10% over the past two months.

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Stocks in the S&P 500 are not doing that much better, down 2% from their May high, and investors are scrambling to cover their portfolios in the event of higher rates. But one sector stands to benefit from the increase in yields. It booked the second highest earnings growth in the first quarter and could jump when second-quarter results come out.

Risks remain but options traders can take advantage of a powerful strategy to minimize losses while amplifying potential returns into 50%-plus profits by the end of summer.

Interest rates can be a mixed bag for companies in the financial sector. While low rates drive down borrowing costs, they also limit the interest banks can charge on loans. The difference between the two, the net interest margin, has dropped to a 30-year low for U.S. banks. Combine this with new regulatory costs after the financial crisis and profitability has been squeezed over the past few years.

But higher rates could give financials a lift this year. The KBW Bank Index (BKX) jumped 20% during the first six months of 2013 as the 10-year Treasury yield increased 0.66 percentage points. So far this year, the 10-year rate is higher by 0.29 percentage points, but is 0.73 percentage points from the February low.

If rates continue to creep higher, banks will be able to increase the amount they get from loans. Since banks are sitting on $2.6 trillion of reserves in excess of federal requirements, they may be able to increase loans without borrowing new money at higher rates. This would increase the net interest margin and drive profitability.

Besides the increase in profitability, the recent surge in rates may spook homebuyers and those looking to refinance into action. Pending home sales for April climbed for the fourth straight month to the highest level since May 2006.

Year-over-year earnings growth for companies in the S&P 500 during the first quarter was just 0.7%, the lowest quarterly growth since Q3 2012. Financials managed to buck the trend and registered the second highest earnings growth rate (13.4%) after health care. Six of the eight industry groups within financials reported earnings growth for the quarter.

Yet, higher rates also pose risk for financials and the general market. The U.S. economy shrank in the first quarter and global growth is still sluggish. Higher interest rates will mean higher borrowing costs for firms outside the financial sector and could weigh on growth.

Against a positive outlook with downside risk, I like to use a call option strategy. It limits the amount you need to commit to a trade, allowing you to limit losses while still participating in the upside potential.

Book a 53% Return From a 4.5% Move in Financials

The Financial Select Sector SPDR (NYSE: XLF) is an extremely liquid fund of 89 companies within the U.S. financial sector. It is heavily exposed to banks (36.8% of holdings), followed by insurance (16.5%), REITs (14.6%), capital market firms (14.1%) and diversified financial services (12.3%). While REITs may react negatively to an increase in rates, the other industries represented in the fund should do well.

XLF trades at a discount to the general market with a price just 14 times the trailing earnings of its holdings. And according to FactSet Research, financials are trading at just 13.3 times forward earnings, making them the most inexpensive sector in the S&P 500.

Among the top 17 holdings in XLF, which represent 60% of the portfolio, earnings expectations are fairly muted for the second quarter but jump higher for the third quarter. The table below shows the median year-over-year earnings estimate to remove the effect of outliers.  

The U.S. economy is expected to rebound in the second quarter, and FactSet estimates year-over-year growth of 2.7% for 2015. This would be an improvement on the sub-par 2% growth of the past few years and the contraction reported in the first quarter. While an increase in yields will probably not come through much in second-quarter profits, I expect management to start talking up the potential for higher profitability for the rest of the year. This could lead to an increase in analyst estimates and bullish investor sentiment for the financials.

I see XLF trading to $25.90 by the end of the summer, which is about 4.5% above the current price. Using a call option strategy, we can amplify that return into 53% profits.

With XLF trading at $24.79 a share, we can buy the XLF Aug 23 Calls for about $1.90 per share. That is a call option with a $23 strike price that expires on Aug. 21, and each contract controls 100 shares, costing you $190 per contract.

The trade breaks even at $24.90 per share ($23 strike price plus $1.90 options premium), just 0.4% above the current price.

If XLF hits my $25.90 target, the call options would be worth at least $2.90 a share ($25.90 stock price minus $23 strike price) for a 53% return in just 75 days. I recommend placing a good ’til cancelled (GTC) order to sell your calls at that price and lock in the return.

The August expiration will come after the majority of the big names in banking report second-quarter earnings, so we should benefit from Q3 guidance and economic news for the quarter. If the market turns lower and takes financials with it, our downside risk is limited to the $1.90 per share we paid for the options.

Options are the best way to leverage potential moves in stocks into huge profits. I’ve seen a $2,390 bet on Keurig Green Mountain (NASDAQ: GMCR) turn into a 34% return in 56 days. A $730 bet on Yelp (NYSE: YELP) yielded a 40% gain in 29 days. And a $525 bet on Valero Energy (NYSE: VLO) made traders a 91% profit in 15 days.

All of these trades were recommended by options prodigy Jared Levy, who has created a technique that makes average annualized gains of 123%. To learn more about it or get his latest recommendation sent directly to you, follow this link. 

This article was originally published on ProfitableTrading.com: Global Bond Sell-off Could Yield Big Profits This Summer