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Trade of the Day: Bank of America (BAC)

The geopolitical scene could turn from bad to worse, which would forestall the rally, but recent action is quite bullish


Technology just passed energy Wednesday as one of the best sectors in the market for 2014. Shares of Google (GOOG), Apple (AAPL), Microsoft (MSFT), Intel (INTC), EMC Corp. (EMC), Qualcomm (QCOM), Cisco (CSCO) and Lam Research (LRCX) have led the tech charge during the past month, eclipsing the expectations of just about every market guru that had their money on social media and cloud-computing stocks.

But big-cap tech isn’t alone as the best sector. On Wednesday, we also saw big banks like JPMorgan (JPM), Goldman Sachs (GS) and Citigroup (C) demonstrate upward momentum. Some leading energy stocks like Chevron (CVX), ExxonMobil (XOM), Anadarko Petroleum (APC) and chemical names Dow Chemical (DOW), Westlake Chemical (WLK) and Air Products (APD) were also on the rise.

I like this broadening out of the market strength, as it lends to a higher market when leadership is found across multiple sectors and is not narrow in scope.

Bonds continue to go nowhere, with the 10-Year riveted at 2.46% against a backdrop of upheaval in Ukraine and Gaza. Two Ukrainian jet fighters were shot down, and the fighting in Gaza is only claiming more lives as diplomacy is proving unproductive and ineffective at all levels. A break in the violence in either situation would provide a fresh market catalyst.

That said, the cautious tone hasn’t dampened investors’ appetite for yield in the best sectors

Between the merger fever, some eyebrow-raising upside earnings surprises and a few big spikes in select biotech names due to clinical breakthroughs, the ball is in the bulls’ court to challenge the 2000 level on the S&P 500 by the weekend. Sometimes momentum just takes over in the best sectors, and the current investing landscape is seeing just that — money coming into the market because there hasn’t been a major pullback even in the face of geopolitical volatility.

The best course of action is to not fight the tape but to employ strategies that provide some measure of protection, like short-term covered calls. I’ve got one for you today in a stock that’s got a technically defined upward target.

As noted above, big financials got a boost and the second half of the year should see the re-emergence of the bank stocks as the economy firms.

In recent weeks, the analyst community has turned more bullish on Bank of America (BAC), citing a pickup in capital markets, higher interest rates and expanding patterns across housing, business and personal loans. In addition, subsidiary Merrill Lynch should post improving numbers to reflect the robust IPO, M&A and general health of the asset management business. The median price target is $20. I’ll be happy with $16 by August.

I hope to ride the name for the balance of 2014, and now is a good time to start playing in one of the best sectors.

For every 100 shares of Bank of America (BAC) you own or purchase at market, use a limit order to “sell to open” 1 BAC Aug. $16 call for a net debit of $15.15 or less.

Example: If you can catch BAC shares on a dip around $15.50, and the BAC Aug. $16 calls trade up to $0.35 per contract, subtracting the targeted call premium you could collect from that stock price ($15.50 – $0.35) would result in a net debit of $15.15.

Unless this net debit can be established, neither side of the trade will fill. If it is filled and the stock is called away on Aug. 16, the net profit is $0.85 ($16 – $15.15 = $0.85), which translates to a 5.6% gain

The option’s ticker is BAC140816C00016000. There are several BAC options available at the Aug. $16 strike, so be sure you’re selling to open the regular monthly calls that expire on Aug. 16. Again, you may need to see a small move in the shares to achieve that net debit, so be patient.

I like short-term covered calls right now because my overall bias is cautiously bullish. As long as the market is being led by high-quality, blue-chip names, then there will be good sponsorship, and we’ll just have to see how far the rally can go while keeping with the idea of hedging in mind when the time is right.

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