Bank stocks are popping on the heels of Morgan Stanley’s (NYSE:MS) blowout earnings. MS shares opened 4% higher amid widespread praise. But with that particular stock gapping right into overhead resistance, buyers should check their enthusiasm. If you’re interested in upping your exposure to financials, I suggest taking a good look at Bank of America Corp (NYSE:BAC) instead. BAC stock has a low-risk buy setup.
Since launching to a new four-month high, BofA has quietly pulled back to its rising 50-day moving average alongside the entire financial sector. Retracements to rising moving averages are commonplace among uptrends and provide low-risk entries for spectators looking to get in on the action.
The beauty of buying BAC stock near support is the favorable risk/reward ratio.
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Traders can place their stop-loss just under support ($23.55) allowing a quick exit if the bounce fails. And if it succeeds, Bank of America has room to run until encountering resistance near the prior pivot high ($25.10).
And with the company having just reported earnings, we don’t have to worry about any surprise gaps mucking up a well-crafted trade.
Momentum indicators like the Relative Strength Indicator (RSI) have confirmed the strength of BofA’s uptrend. It carved out a higher high alongside the stock earlier in the month and despite the recent drop remains above 50.
The Trade on BAC Stock
As usual, implied volatility plunged following Tuesday’s earnings release. BofA’s IV Rank now sits at 1%, so option premiums are dirt-cheap here. Were I a raging financial bull, I’d suggest a long call play here, but since Bank of America is a slow-moving stock, I suspect call spreads are a better choice.
Buy the Sep $23 call option while selling the Aug $25 call option for a net debit of $1.26 or better. This creates a diagonal spread designed to profit if BAC rises over the next month. The max reward is somewhere around 70 cents per share, but I suggest exiting if you capture 40 cents per share profit. That translates into a 32% return.
The max loss is limited to the initial cost but to minimize the damage, consider exiting if BAC stock drops below the $22.70 support level.
As of this writing, Tyler Craig held bullish positions in BAC. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
