Bank of America Corp (NYSE:BAC) is sporting a pleasant narrative these days. But if it’s profits you desire, stay away from an outright buy of BAC stock. Instead, let me show you a much better bullish trade that offers an attractive rate of return.
Over the past few weeks, things have grown decidedly bullish for Bank of America. Most recently, the Oracle of Omaha gave a gentle, but definitely bullish, stamp of approval during Berkshire Hathaway Inc.’s (NYSE:BRK.B) annual shareholder meeting.
Specifically, he said that if the warrant on his preferred shares expired today, “we would keep the stock.”
There’s also the guy in the Oval Office to possibly thank for BofA’s better fortunes of late. The conversation of deregulation for the banking industry has begun to build once more — and with it, promises of easier profits (and ultimately BAC stock holder wealth) has grown.
Bank of America’s Stock Chart
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When I last wrote about Bank of America just over one month ago — depicted by the yellow oval highlight on the chart — I was bearish. At the time, technical evidence seemed to support a larger correction in the works.
The detailed “caution flag” worked its way into an additional decline of 5% in BAC stock, but from there, a bullish change of character emerged. A test of the prior pivot low from March found support, and a 14% corrective double-bottom pattern was established.
Currently, Bank of America is looking more bullish than not after taking out potential resistance from the 50-day simple moving average. However, stochastics are overbought, and April’s pivot high of $24.35 combined with the 62% Fibonacci retracement level are still acting as resistance.
It’s a tough spot to buy BofA with any technical conviction.
How to Make 900% Returns on BAC Stock
One lower-risk play that looks well-suited for a bullish (but contained) play in Bank of America is a combo spread package. This also will give us the possibility to buy shares at a discount.
One combination that looks attractive is selling the 9 June $23.5/$23 put spread and purchasing the 9 June $24.50/$25.50/$26.50 call butterfly for a small debit of 10 cents or better with BAC stock at $24.18.
What does this package do?
On the upside, should a bullish move occur over the next month, the long butterfly can expand up to $1.00 with Bank of America stock at $25.50 on expiration. For a cost of 10 cents for the trade, that amounts to an idealized 900% return or profit of 90 cents.
Upside profit potential on an expiration basis spans a wide swath of real estate, from $24.60 to $26.40. Personally, I’d be on the prowl for recouping the initial cost during the life of the position and sitting on the balance, if shares allow it.
On the downside, if shares were to reverse lower from here, an out-of-the-money put spread has been sold. Incorporating the debit, the trader can accept buying BAC stock at $23.60, a 2.5% discount to current levels.
Getting long Bank of America just got a whole lot better.
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.
