Bank of America Corp (NYSE:BAC) is a premier bank. It has withstood the test of the worst financial debacle and has since emerged stronger. They survived an onslaught of government prosecution and public opinion dissension.
With the advent of the Donald Trump era, banks caught a new wind in their proverbial sails. The presidential promise of less red tape frees them to do more banking and less litigating. Plus interest rates should be rising for the next few years and experts tell us that this will further benefit bank profitability.
However, the progress for BAC stock stalled in May; it has recently fallen over 7%. This was mostly in reaction to a spike in U.S. Bonds and a drop in rates.
Click to Enlarge Now, in addition to the stalled momentum, BAC has to contend with bearish technical patterns for its own stock. Conversely, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) hints that Bonds have the opposite situation. This leaves the door open for more near-term downside risk for Bank of America.
Since last December, the BAC share price has bounced off a baseline area several times thereby tracing a complex head and shoulder which could have bearish consequences to the tune of — $1.50 per share. If price clearly falls below $21.90 it could retest $20.40. Although this is not a forecast, it is a scenario that I need to contemplate.
Fundamentally, Bank of America is cheap from a price-to-earnings perspective. Its price-to-book is under one and it pays a dividend. Unless we are expecting a market-wide crash, these are very attractive metrics for a top notch bank.
If BofA stabilizes here, I like it as a bullish mid-term entry point. But given the technical concerns I’d like to make my bet a pair trade to account for the potential dip. So my thesis is that BAC stock should hold near recent supports and any further dips would eventually be bought.
BAC Stock Trade Idea
The Bullish Side: Sell the BAC Jan 2018 $20 put and collect 90 cents to open. Here I have an 80% theoretical chance that I will retain my maximum gains. But if the price falls below my strike, I will accrue losses below $19.10. Alternatively to selling naked puts, I could sell a $20/$19 credit put spread and yield 30%.
To temporarily safeguard against a potential near-term dip, I will add a cheap bearish trade to capture it if it comes. Buy BAC June 8 $21.50 puts for pennies. If the TLT continues its rally and BAC triggers the sell signal, these puts should benefit.
The pair trade is bullishly biased, meaning the debit puts are only a partial offset of the bullish ones.
Selling options is risky business so I never risk more than I can 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.
