Bank of America Corp (NYSE:BAC) has been trading in a predictable range for the past few months. This is music to my ears since I sell risk for a living. Predictability means that I can rely on levels against which I sell risk for income.
Case in point was my last write up created income of thin air even without the need for perfect timing. Today I want to reset the risk but on a different time frame.
The thesis is the same where I expect that the support levels in BAC stock since January to hold through the year.
Fundamentally, Bank of America is as solid a bank as anyone can have. They emerged out of the financial debacle stronger and leaner. This didn’t come easy as they went through hell and back appeasing the regulators.
The government forced them to buy bad banks during the crisis then prosecuted them for the actions of those banks they saved. Talk about a weird way of thanking someone.
Click to Enlarge Technically, the consistent trading band is a good base. These periods of consolidation usually serve as springboards for higher prices.
But this same zone also becomes critical to hold. IF BAC Loses it, this could invite momentum sellers to retest $21. While this is not a forecast that I deem realistic, I do need to account for its possibility.
Another important factor is the U.S. government. First the U.S. Federal reserve is in a tightening cycle so rates should trend higher and that would benefit BAC stock through the end of the year. Second and perhaps more important is that the Trump promise for lower regulations remains in effect.
The Bet: Sell BAC Nov $20 put and collect 50 cents per contract. Here I have an 85% theoretical chance of success and retain my maximum gains. But if price falls below $20 then I have to own it and accrue losses below $19.5 per share.
Usually I like to balance my trades by selling opposing risk but given the size of the buffer I will opt out for now. This is something I can add at a later time.
Selling naked puts is not appropriate to all investor so for those I can turn the setup into a bull put spread instead.
The Alternate: Sell BAC Nov $20/$19 credit put spread where I have a smaller risk yet still yield 19% with 85% theoretical certainty. Compare this with risking $23.4 then hope BAC rallies 19% just to match the performance of the spread.
Selling options is risky business, so I only risk what I am willing to lose.
Learn how to generate income from options 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.
