BB&T: A Simple Trade for a Simple Chart

by John Kmiecik | July 25, 2013 9:35 am

Trading can be a very complex task at times, though at others, it can be pretty basic. The problem comes when traders try to complicate an uncomplicated situation.

Here is a simple trade idea on a stock that looks like it want to continue to move higher:

BB&T (BBT — $35.68): Long Calls

The trade: Buy the September 36 calls for 65 cents or less.

The strategy: The long call is probably the most well-known strategy in options. Generally, it is used for a bullish outlook on the underlying. For this trade to profit, BBT needs to move higher, and the call premium needs to increase to an amount more than was paid. Maximum profit is theoretically unlimited because BBT can continue to rise, and the maximum loss is 65 cents or whatever was paid for the option if BBT finishes below $36 at September expiration. Breakeven is $36.65 at expiration based on a cost of 65 cents.

The rationale: BB&T is a bank that has been doing really well this year, up 23% year-to-date and coming off a great earnings report that showed profits up 6.9% year-over-year. It also recently declared its next dividend payment — a 23-cent quarterly distribution payable Aug. 9 that translates into a 2.6% annual yield on current prices.

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If we look at the chart, since the middle of April, BBT shares have been climbing higher. The stock has a minor pivot area around $36 which it needs to clear, and then it looks like the next area of resistance will be around $38. Buying a call option with some time until expiration can capture the potential move.

Sometimes — like when a chart appears to be so straightforward and trending higher, as is the case here — a simple strategy is the best strategy.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

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