Bank of America Corp: Fight the Fed, Short BAC!

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This year has so far been a difficult year for the financials. Bank of America Corp (BAC) fell more than 30% before the February bounce. Even now, it still trades about 20% below last year’s range. The drop in BAC stock was technically foretold.

Fundamentally, the Federal Reserve has had its finger on the profit and loss of financials for almost a decade. By keeping rates artificially low, the Fed made it harder for banks to profit.

Now, we are supposed to be in a rate hike phase, but Federal Reserve Board Chair Janet Yellen is reluctant to go through with the raises. So banks like BofA will continue to struggle for the near term.

Equity markets have been dreading the rate hikes for years. So even if the Fed raises rates, markets in general are expected to fall. So any celebratory spikes in BAC stock will be temporary. The path lower seems more likely than a trajectory higher.

Technically, BofA shares are currently showing vulnerabilities down to $12 per share. So I want to trade this possibility.

BAC Chart
Click to Enlarge 
Typically, shorting stocks outright is a dangerous position, as losses can be unlimited. If I short BAC and it rallies, I will accumulate losses for as long as the rally continues. Instead, I can use put options to easily accomplish a short trade with limited risk.

BAC Stock Options

Trade #1: Buy the May BAC $13 put. For this I pay 43 cents per contract. This is my max potential loss. I profit if BAC stock falls by May 20 expiration. The faster and deeper it falls, the more I profit. Usually I like to lower my entry cost by selling risk to generate income. In this case, I am tempted to hold the puts in the aforementioned trade alone at least for the first few days. The $11 per-share level has served as decent support. If I am convinced that it will continue to act as such, then I can set a second trade to generate potential income.

Trade #2 (Optional): Sell the November Bank of America $9 put. For this I collect 17 cents per contract. If successful, I would thereby cut my out-of-pocket expense nearly in half. Selling naked puts is risky and requires me to be willing to own the BAC stock at $9 per share. Ideally, I would want BAC stock to fall up to 30% by May 20, and then bounce. A longer dated Bank of America chart shows that $11 per share has served as strong support since the 2008 crash. But I do have to recognize the technical consequence of BAC losing the $11 level.

The options markets allows me to take controlled risk as long as I structure trades with quantifiable outcomes.

I never take a trade that I don’t understand. I only risk money I can afford to lose.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/bac-stock-bank-of-america-options/.

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