Bank of America Corp: Can a Dividend Double Save BAC Stock?

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Financials took a serious beating on Friday, as investors fled banking stocks in the wake of the U.K.’s unexpected vote to leave the EU. The news hit banking stocks like Bank of America Corp (NYSE:BAC) particularly hard, as Treasury yields dropped to multiyear lows.

In fact, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) fell 1.7% and the SPDR S&P Bank ETF (NYSEARCA:KBE) plummeted 7.2%. Global banking poster child Bank of America was hit harder than most, with BAC stock dropping 7.4%.

But this selloff is opening up an opportunity for savvy traders.

BAC Stock
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Bank of America stock started Monday trading off 4%, sending shares down to test their April lows near $12.50. What’s more, with the full impact of the Brexit still unknown, losses could accelerate, sending BAC stock down for a retest of its multiyear lows in the $11 region set back in early February.

That said, Bank of America recently passed its Federal stress tests, and could be poised to up both its dividend payout and its share buyback program. In fact, some analysts believe that Bank of America could nearly double its dividend — not an insignificant measure, as it would take BAC from a modest 1.6% yield to an attractive 3.2%.

BAC stockholders will find out if the Fed will approve or reject capital return plans this Wednesday. In the meanwhile, analysts appear to be in a wait-and-see mode following the events of the past week.

There have been no major upgrades for downgrades of BAC stock as of yet. Checking in with Thomson/First Call reveals that most brokerage firms are quite smitten with BAC stock, dishing out 27 buy ratings, compared to just six holds and no sells. The disturbing thing here — at least from a contrarian perspective — is that there is plenty of room for downgrades, and very little room for sentiment to get much more bullish.

Turning to options activity, speculative traders also appear to be quite bullish on BAC stock. Currently, the July/August/September put/call open interest ratio rests at an optimistic reading of 0.63, with calls handily outstripping puts among near-term options. Zeroing in on the July series, this ratio falls further to a reading of 0.50.

Overall, July 15 series implieds are pricing in a potential move of about 7.7% for BAC stock in the wake of this week’s second round of Fed stress test meetings. This places the upper bound at about $14, while the lower bound lies at $12.

2 Trades for BAC Stock

Call Spread: Those traders looking to side with the bulls might want to consider a July $13/$14 bull call spread.  At last check, this spread was offered at 39 cents, or $39 per pair of contracts. Breakeven lies at $13.39, while a maximum profit of 61 cents, or $61 per pair of contracts, is possible if BAC closes at or above $14 when July options expire.

Note: These options prices are sure to shift sharply based on Bank of America’s movement.

Put Spread: Alternately, traders who don’t believe that BAC’s selloff is finished and want to side with the bears might want to consider a July 15 series $12/$12.50 bear put spread. At last check, this spread was offered at nine cents, or $9 per pair of contracts. Breakeven lies at $12.41, while a maximum profit of 41 cents, or $41 per pair of contracts, is possible if Bank of America stock closes at or below $12 when July options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/can-dividend-boost-save-bank-america-stock/.

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