The market is setting up for an oversold bounce, and Bank of America Corp (BAC) looks deserved of the proverbial get out of jail card for bullish intermediate-term investors. Let me explain.
About a month back, this strategist squared off against bulls in Bank of America stock. As a card-carrying bear that day, we were proven to be more than a bit right on the price chart.
Shares of Bank of America have cratered in excess of 20% and a discussed long put strategy rang the register, gaining in excess of 300%.
On the other hand, our rationale for being bearish on Bank of America wasn’t 100% correct.
Though I believe partial credit for our insights is due, the most popular theme of late for exiting BAC stock has been its portfolio of loans tied to the energy sector.
With the price of crude oil down roughly 15% and below $30 a barrel since our analysis, investors have been piling aboard the train which has BAC stock heading for doomsday.
At the same time, I’ve hopped off the bearish express train and am now waiting in the depot, so to speak, for a ride north in shares of Bank of America.
This strategist’s new view reflects current conditions worthy of a bottom in Bank of America.
First, investors need to take a deep breath and realize BAC stock’s energy exposure that has caused so much panic, amounts to a very modest 2% of its assets. That’s it! This is not 2008 all over again!
Second, investors need to appreciate the exaggerated price move in Bank of America has allowed for very attractive recession-like pricing without an actual recession here in the U.S.
Lastly, take a good solid look at Bank of America on the weekly chart and you’ll see there’s decent evidence for a bottom to develop.
BAC Stock Weekly Chart
The prior analysis of Bank of America’s stock chart back in January was literally “head and shoulders” above the rest.
A described topping pattern in BAC rather quickly broke through its neckline and fulfilled an initial first target zone from $13 – $13.25.
More stunning has been the continued aggressive selling pressure in shares of Bank of America over such a short period of time.
As of Tuesday’s close, shares of Bank of America have traded down to a low of $11.96 and in the process, completed our previously discussed, estimated measured move to around the $12 level.
The bearish — or more aptly, panicked — selling has also put BAC stock into a testing position of its 50% retracement level dating back to the 2012 low to 2016 cycle high.
All told, it’s time to shift gears and approach Bank of America as likely closer to a bottom than not and look for bullish opportunities while there’s literally blood in the streets.
Bank of America Buy-Write Strategy
With both overall market and Bank of America option premiums elevated and earnings out of the way, I like a buy-write strategy as a way to begin an intermediate bullish campaign in BAC stock.
Checking the BAC stock options board, selling the Weeklys March 4 $12.5 call against the purchase of stock to complete a buy-write in Bank of America is attractive.
As of Tuesday’s close, the combo pricing of selling the Bank of America call for 45 cents and buying BAC stock for $12.20 amounts to a buy-write spread price of $11.75.
Shares of Bank of America are indicated higher and near $12.50 in Wednesday’s premarket.
Based on the contract’s Greeks, a buy-write in Bank of America is estimated to fetch $11.90 to $11.95.
Bottom line, with income generation of 4% to 5% for less than a month holding period and breakeven price slightly below Tuesday’s technical low, that’s a solid way to begin building a recession-busting strategy in Bank of America.
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.
