For Bank of America Corp (NYSE:BAC) investors, 2016 has been a year of technical incarceration. However, that could be changing sooner rather than later based on the BAC stock chart and the Federal Reserve.
A perpetually data-dependent Fed may finally have the ammo it needs to raise rates following this month’s surprisingly strong nonfarm payrolls data. And that would be great news for BAC stock.
The net interest margin, or the difference between what Bank of America takes in loans and what it pays out in deposits, is amplified in a big way when rates are rising, especially given today’s historically low interest rate base.
Now the balancing act of economic growth, specter of inflation and the need to raise rates is gaining credibility versus views of a Fed handcuffed by weak global markets.
Far from a crowd favorite — we saw how well consensus opinion worked prior to the Brexit vote — a 25 basis point increase come September’s FOMC meeting is on the table and potentially a big shot in the arm for BAC stock.
BAC Stock Daily Chart
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Technically, BAC stock has been consolidating constructively above the 200-day simple moving average for the past couple weeks since the nonfarm payrolls report. Support above the long-term moving average is nice to see as shares return to “bull territory.”
The bullish price action also puts BAC stock within spitting distance of its April high. That’s even nicer to consider as BAC could be breaking out to fresh six-month highs and help with upside momentum.
BAC shares are still underwater by roughly 10% for the year, lagging the S&P 500 Index all-time-high performance. In our view, the massive spread in percentage performance allows for a nice margin of safety for BAC stock investors, even if the rate conversation fails to turn into immediate action.
BAC Stock Synthetic Long Call
BAC stock volatility and premiums are trading near year-to-date and historically low levels. The combination, along with our discussed bullish stance support purchasing a long put in conjunction with BAC shares.
By purchasing a BAC put along with shares an investor manages risk with defined downside risk. Also known as a synthetic call, this position also maintains the benefits of BAC stock ownership in the form of upside potential and collection of future dividends.
Reviewing the BAC options board, the Jan $14 synthetic call is attractive. With BAC stock trading for $15.16, the put fetches 57 cents resulting in a spread price of $15.73.
Bottom line, the cost basis is roughly 3.75% more than a standalone BAC stock position. But given the investor’s risk is contained to just under 10% for the next five months and oodles of Fed talk or something more in-between — a BAC synthetic call makes both sense and cents, and on more than one level.
Investment accounts under Christopher Tyler’s management currently own hedged BAC stock and option positions. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
