My last write up on Bank of America Corp (NYSE:BAC) yielded fast profits thanks to the recent market-wide dip. If I hadn’t scalped the profits on the dip, I would leave the trade open into earnings report two weeks from now.
Usually, I like to sell risk against proven supports … but the earnings event adds an ominous element of gambling, thereby negating my homework. The short-term reaction to earnings is mostly guesswork. For that reason, any sizable trades in Bank of America options would need to be longer-dated with a large buffer from the current price.
After the elections, traders on Wall Street quickly priced in a massive rally in banks. The thesis in play expects a huge upside in bank earnings from higher rates and a loosening of the the regulatory climate. Fundamentally, Bank of America still is a solid bank that should, in the long term, be a buy.
Click to Enlarge Technically, BAC stock consolidated well between December of 2016 and mid-February, before it spiked 10% to more than $25 per share.
On March 21, BAC took a beating along with the rest of the equity market, but it wasn’t all bad news. BofA held at that consolidation zone and now it’s hovering at the neckline from where it rallied this year.
Considering the bulls’ defense of the base zone (pictured rectangle on chart), I am willing to risk an upside surprise move in BAC on earnings.
I am confident that in the worst case scenario, BAC management is likely to not sound as exuberant … but they are not likely to negate the aforementioned thesis. They could pour a little tepid water on it, but won’t change the facts that higher rates and less regulation will result in healthier P&Ls.
How to Trade BAC Stock
The Bet: Buy the BAC May $24/$25 debit call spread for 30 cents per contract. This is my maximum potential loss. I opted for a near-the-money calls so that if investors buy the earnings event then I am likely to profit immediately. It would be a shame to guess the correct direction, but miss out on size of move. If I haven’t done so already, to reduce my out-of-pocket exposure I will sell downside risk against proven long-term support.
The Bank: Sell the BAC Dec $20/$19 credit put spread for 25 cents per contract. Here I have a 85% theoretical chance of staying out of the money. A more aggressive trader who intends on owning BAC stock can sell the $20 put naked. If BAC falls below that, they will be put the stock and accrue losses.
Learn options as easy as 1-2-3 here. 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.
