A little more than a month ago, the outlook for financial stocks such as Bank of America Corp (NYSE:BAC) looked grim. President Donald Trump was revisiting a campaign promise to to break up “universal” banks, and the idea that some form of the Depression-era Glass-Steagall Act would make an appearance was gaining traction. This was bad news for BAC stock, as well as other majors including JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).
BofA, which had led the financial sector higher, began to deteriorate. Traders began to worry.
Shift to last week. Wall Street had been worried that reform (i.e., repeal) of post-2008 financial crisis restrictions would never see any progress as the Russian investigation gained considerable traction, stalling Trump’s pro-America agenda. Then, on June 6, the House passed the Financial Choice Act — legislation that essentially guts the 2008 Dodd-Frank and repeals the Volcker Rule.
And the game was back on.
Click to Enlarge Since Congress took action on June 6, BAC stock has shot nearly 7% higher, rebounding off its lows near $22 and reclaiming all of its major short-term technical moving averages.
What’s more, shares are now poised to challenge the $24 region just ahead of today’s all-but-certain Federal Reserve interest-rate hike.
Just like that, expectations have shifted once again for Bank of America stock. If you managed to get into the Jun $22/$23 bear put spread I recommended back on May 2, hopefully you took profits at the lows early last week or set stops to preserve your winnings before the rally caught hold.
If not … well, I have a couple more trades to consider today.
Sentiment and Options Hints
Looking ahead, sentiment among the major indicators remains largely the same.
Thomson/First Call reports that 23 of the 32 analysts following BAC stock rate the shares a “buy” or better, with one “sell” rating emerging in the past month. Meanwhile, the 12-month price target is holding at $26.03, representing a healthy premium of about 9.5%.
Options traders remain heavily bullish on BofA. The July put/call open interest ratio currently rests at 0.39, with calls nearly tripling puts among near-term options. What’s more, peak call OI for the series totals a hefty 233,000 contracts at the $24 strike, with options traders heavily anticipating a another breakout for the shares.
Overall, July implieds are pricing in a sizable 6% move for BAC stock heading into expiration. This elevated volatility can be worrisome for traders, but it offers considerable potential for options traders — at the expense of higher premiums.
Currently, the upper bound for the expected move lies at $25.53, while the lower bound rests at $22.50.
2 Trades for BAC Stock
Call Spread: The bull case for Bank of America hinges upon the Senate either passing the Financial Choice Act or seriously considering the legislation while remaining in a holding pattern. As long as the act is on the table, BofA shares should continue to rise.
Traders looking for BAC stock to extend its current rally might want to consider the Jul $24/$25 bull call spread.
At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $24.35, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if the stock closes at or above $25 when July options expire.
Put Sell: The problem with Bank of America’s current bullish setup is that we are relying on Congress — an iffy prospect at the best of times. What’s more, elevated implieds are cutting into what would be much higher returns on the bull call spread.
Another way to approach this situation is to sell premium via a Jul $22 put sell.
At last check, this put was bid at 21 cents, or $21 per contract. The upside, as usual, is that you keep the premium as long as BAC stock closes above $22 when these options expire. The downside is that should BofA trade below $22 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $22 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
