Sell Bank of America Corp (BAC) Stock Before the Rate Hike!

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A baked-in rate hike and faithfully optimistic rally mean it’s time to play Bank of America Corp (NYSE:BAC) for a bit of downside. But if you don’t want to break the bank while looking for opportunities below today’s priced-for-perfection levels in BAC stock, an out-of-the-money long put spread looks attractive. Let me explain.

Bank of America Corp (NYSE:BAC)
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Tuesday marks the start of the two day FOMC meeting. But for all the analytical sound bites and penned views investors are sure to be bombarded with regarding what Federal Reserve Board Chair Yellen and her merry band of financial marauders will announce, we’re fast closing in on a zero chance of a surprise.

What’s that mean for the financial sector and BAC stock? With a 25 basis point rate hike nearly written in stone with the latest 89% “yes, they will” poll and Fed action accompanied by an equally certain, more of the same, feigned transparent, “normalizing rates, but data dependent” camera-friendly epilogue — a “sell-the-news” reaction in BAC stock appears highly likely in our view.

Some investors may wrongly take this bearish stance as sacrilegious or even as anti-America. BAC stock and other financials of course have led the market aggressively higher under the guise of the “Trump Put” and a new establishment intent on making our fair land great again. But, it’s not.

Our timely concern with Bank of America is simply appreciative of where BAC stock is today and the age old wisdom that a fool and his or her money are soon departed, unless you’re the President—but then again that’s still a big question mark.

BAC Stock Weekly Chart

 


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Source: Charts by TradingView

In fact, shares of BAC appear to be equally at risk of reversing today’s overly-bullish price behavior and an environment embodied by nothing but blue skies ahead conviction from investors.

The fact is, I’ve been bullish on BAC stock on more than a couple occasions over the past year. But the last leg higher — and mind you, on top of massively optimistic and large price gains — has been marked by secondary bearish divergences in BAC’s stochastics. That’s not good.

Now a bearish shooting star topping candle has formed in BAC stock. What’s more, the pattern has just received confirmation with this week’s penetration of the $25.08 low. Net, net the trading opportunity looks good for shorts in the near term.

If a trader were to short BAC shares with a stop-loss above the candle high of $25.77, risk would be set at 2.75%.

Alternatively, in a bearish sort of way, I like the idea of an initial profit-taking adjustment using a ratio of 2-to-1. That roughly matches the highs of BAC’s breakout from congestion at $23.55 and where we might expect a key test of technical support to occur.

BAC Stock Bear Put Spread  

Given what’s been discussed, I like the idea of limiting risk in BAC stock to a shorter-term play based on an anticipated “sell the news” reaction, and position with actual defined risk and reduced Greeks. A bear put spread fits this type outlook well.

Reviewing Bank of America’s options, the 31 March $24.50/$23.50 put vertical is priced for 18 cents with shares of BAC stock at $25.15.

If shares of BAC remain above $24.50 over the next couple weeks and no action is taken in the interim, the trader loses the full debit. The upside is risk is limited to the 18 cents no matter how potentially wrong our outlook might be.

An expiration breakeven of $24.32 is 3.3% below the current share price of BAC. A test of the aforementioned support of $23.55 requires a decline of 6.4% and would value the vertical at 95 cents. That nearly maximizes the spread’s potential with a profit of 77 cents or return of over 425%.

In the interim, if BAC stock is moving favorably for the spread, profitable or risk-reducing adjustments should always be considered. One that’s always on our radar are opportunities to fashion this type vertical position into a no-risk long butterfly, rather than staring a gift horse in the mouth.

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.

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 and StockTwits.


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