The option trade outlined below can take advantage of that potential support, as well as of options that are priced more expensive than they were earlier in the week.
The Trade: Sell the Jun $22 put and buy the Jun $21 put for a credit of 15 cents or more.
The Strategy: The maximum potential profit for this trade is 15 cents if BAC stock is trading at or above $22 at Jun expiration. Both put options would expire worthless. The maximum loss is 85 cents ($1.00 – $0.15). This would occur if Bank of America is trading at or below $21 at June expiration. Breakeven is $21.85 at expiration based on a credit of $0.15.
Naturally, for this spread to succeed, an options trader would prefer for BofA to move higher than lower to lower the premiums. If the stock does move lower, the put premiums may increase. Consider it to be a bearish sign if BAC stock closes below $22.
Options traders like to use delta as a percentage of the option expiring in-the-money (ITM). So in this case, the short option had a delta of 0.28 so it has a 28% chance of expiring ITM and a 72% chance of not. The goal of this trade is to buy back the spread for less money or have the options expire worthless. A 72% chance may be worth the risk.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at firstname.lastname@example.org. As of this writing, he did not hold a position in any of the aforementioned securities.