It’s no secret that the banking sector is back in favor with President Donald Trump in office. Bank of America Corp (NYSE:BAC) has run up more than 30% since the election. While I’m usually not one to chase a stock after such move, for BAC stock, I’m willing to make an exception.
I’ll warn you that this trade will be a boring one. But when selling premium, boring is beautiful.
Financials have experienced a general reset of levels. The promise of reduced regulations stopped traders from looking down into the abyss lows of bank stock prices. Instead, investors are now looking up toward all-time highs.
Thing is, both extreme opinions are usually wrong, and that’s why I like selling risk against extreme opinions. Because the truth lies somewhere in the middle.
Instead of buying BAC stock, I will look toward the options market. I don’t plan on actively trading financial stocks, so I want to make this trade last me all year.
The idea is to sell someone a lottery ticket. The secret? Choose a level in BofA so their ticket will be their loss … and our gain.
How to Trade BAC Stock Now
The trade: Sell the BAC Jan 2018 $15 put for 35 cents per contract to open. By selling a naked put, I commit to buying Bank of America shares if they fall any lower than my strike. I only do this if I’m willing and able to own the stock at a 30% discount should it fall to me.
Selling naked puts is not suited for everyone, of course. But I can modify the trade to better fit milder risk profiles.
The alternate: Sell the BAC Jan 2018 $15/$13 credit put spread for 17 cents per contract — a potential yield of 9% on money risked. Both trades have a 90% theoretical chance of success based on today’s data.
Click to Enlarge I do have to recognize that technically, BAC stock is vulnerable to some downside if recent support fails and the triangle (pictured in the accompanying chart) breaks. But that also could present an opportunity, because more buyers could step in if price breaks above the triangle.
In that case, I would add a bullish call position in Bank of America to capture the breakout. Otherwise, time will do the work for me on the puts sold.
I am not required to hold my trades through their expiration. I can close at any time for partial gains or losses.
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.
