The market is setting up for a bounce, but don’t let Bank of America (BAC) steal your money! BAC stock is a short and the time is nearly right to earn a return that pays a whole lot better than your savings account.
Let me explain.
They say paybacks are a you-know-what. By my reckoning, though, the “banksters” at shops like BofA were mostly handled with kid gloves following the worst of the financial crisis back in 2008 and 2009.
Okay, maybe shares of BAC stock haven’t been received with the same coddling. And it is true BofA and other cronies like Citigroup (C) and JP Morgan (JPM) have had to cope with new rules and increased regulatory pressures since 2009. But not a single suit went to jail, and now they’re bigger than before!
But now and for injured shareholders who took the real fall, it may be time to extract some money from Bank of America as a bearish short with a couple favorable supports keeping pressure on BAC stock in the months ahead.
First, the Fed’s recent 25-basis-point rate hike doesn’t necessarily mean it’s all unicorns and rainbows in 2016 for BAC stock.
It’s true BofA is benefiting right now, as the prime lending rate was ratcheted up, but deposit rates haven’t yet budged. But that’s a highly simplistic vacuum of sorts thinking the interest rate spread is a magical elixir for BAC stock.
Secondly, heavy exposure to a wobbly economy in China could pressure BAC stock. While BofA’s risk to China has been reduced since 2013, the company still maintained a hefty $12.5 in China-related assets and less than 10% of those hedged as of last quarter.
There’s also the BAC stock chart. Some might argue BAC’s failure to recover to all-time-highs like the broader market makes it cheap. I’d argue BAC stock is actually “head and shoulders” above the rest, as a short!
BAC Stock Weekly Chart
Click to Enlarge
More to the point and technically speaking, BAC stock has established a head-and-shoulders topping pattern.
The reversal formation in BAC stock should conservatively produce a measured move to around $12 based on the vertical distance from the head to neckline once that support is broken.
Having said that, with a 38% retracement and 30% corrective move from about $13 to $13.25, that would be my initial downside target for BAC stock.
I’d use $14.81 in BAC stock as a trigger for bearish trade initiation, which is 50 cents below Monday’s close. This price level is fractionally under the session’s daily chart bullish hammer and should provide momentum to move BAC stock cleanly through the weekly neckline.
BAC Stock Long Put Strategy
Checking the BAC stock options board, the April $14 put for 55 cents to possibly 60 cents is a long put strategy viewed as attractive in lieu of trying to short shares of BAC.
The put contract is currently priced at 41 cents, but given its initial directional risk, volatility and time decay factors, I’d anticipate having to pay between 55 and 60 cents should BAC stock move through the discussed $14.81 level.
The limited risk of the BAC April $14 put is a nice feature, of course. So is the fact the contract’s profits will grow just like shorting BAC stock if shares move aggressively lower.
Bottom line, though — the offering price for this BAC contract also fits in well with the couple downside price targets given. And with plenty of time on the calendar, BAC stock bears armed with this long put stand to make some of their own bank, without requiring a full-fledged repeat of the financial crisis.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
