My last Bank of America Corp (NYSEARCA:BAC) trade is performing well even through earnings. A month ago, I used BAC stock in a trade where I sold premium for income, and now I want to go back to the well for the winter.
However, I continue to argue that, based on open interest data, traders should not chase the Financial Select Sector SPDR Fund (NYSEARCA:XLF) too far. Upside could be limited.
Fundamentally, there is no doubt that BofA has had its fair share of regulatory issues. But it is a solid company with decent management, so I anticipate that the bank will be able to overcome its difficulties eventually. And BAC stock should move with the direction of the overall market.
Click to Enlarge Technically, I see price action that suggests BAC stock price stabilization and a base-building process that I can sell against to collect premium. However, instead of buying Bank of America shares, I’d prefer to use the option markets — especially at stocks’ nosebleed levels right now.
It is important to note that BAC has recently rallied hard off the $12 per share level. Now it faces a prior long-term failure level, which presents an opportunity to spike past it to $15.50 per share or higher. However, markets have “sell memory,” and the $14/$15 area could cause a retest of the recent lows. Should the bearish scenario unfold, $13 per share level should lend support.
Regardless of the end run of this rally, I can still structure bullish trades for profit without needing to know where BAC stock will go. I only need to know where it won’t go and sell risk there.
3 Trades on BAC Stock
Trade No. 1 – The money maker: Sell the BAC Nov $12 put to collect 23 cents per contract. Ideally, you need BofA to stay above $12 per share through mid-November. Selling naked puts is risky, so only make this trade if you’re willing to own BAC stock 15% lower than where shares are today.
Trade #2 – Variance: I can modify the first trade to put less money at risk. Sell the BAC Nov $13/$12 credit put spread for 19 cents per contract. If successful, this trade yields 23% with an 80% theoretical chance of success.
Unlike trade No. 1, this second setup offers a limited max loss of 80 cents per contract. The downside is that I would be left with a smaller price buffer. My risk line is $1 closer to BAC current price. Another trade that would work would be the Jan BAC $12/$11 credit put spread.
Trade #3 – Optional Add-On: If you believe BAC is headed for a bigger breakout, you can use the premium collected from the sold puts to buy calls. Buy the BAC Oct $16 call for a cost of 15 cents per contract, or the Nov $16/$17 debit call spreads for a 13-cent net debit.
I personally prefer to simply collect the premium and watch time do its thing.
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. You can follow him on Twitter at @racernic and stocktwits at @racernic.
