Let’s just get this out of the way: An interest-rate hike is coming. It may not arrive at next week’s Federal Open Market Committee (FOMC) meeting, but it’s coming. And Wall Street is nervous. And rightly so. The U.S. economy isn’t quite as strong as the Fed would like you to believe, and higher rates mean a stronger dollar, which squeezes already tight corporate profits. There are opportunities for profit, however, especially with interest-rate sensitive companies like Bank of America Corp (NYSE:BAC).
The main selling point for BAC stock is that Bank of America stands to see a boost to its bottom line following an interest-rate hike, as the higher rates lift revenue at BofA’s investment unit. In fact, many BAC shareholders came into this year with high hopes, as the Fed was eyeballing a whopping four hikes in 2016.
When those promises failed to materialize, Bank of America took a nosedive.
But rate-hike chatter has increased since late June, and commentary out of the Fed has been quite hawkish in recent weeks. As a result, Bank of America stock has rallied nearly 30% since June, with the shares looking to break out above long-term resistance at $16.
Bank of America Sentiment and Charts
Click to Enlarge Technical indicators are currently pointing toward additional near-term upside, with the 50-day moving average crossing above its 200-day counterpart. Additionally, BAC’s controlled pullback over the past week has moved the shares out of overbought territory, leaving Bank of America near support at $15.50 and its 20-day MA.
Bank of America also features some favorable sentiment. According to Thomson/First Call data, analysts currently dole out 10 buy ratings, 17 holds, and seven sells, with a consensus price target of $17.31. While the Fed is unlikely to raise rates next week, an increase in hawkish commentary or any indication of a possible time frame could elicit upgrades or target increases from the brokerage community.
Options traders appear poised to take advantage of any upside move for BAC stock. During the past month, the front-two month put/call open interest ratio has plunged from 0.75 in early August to its current perch at 0.49, with calls more than doubling puts. Looking out to the October series shows a bit more caution, with the ratio sitting at 0.69, but calls are still rising in popularity.
Zeroing in on expectations for next week and the FOMC meeting, weekly Sep 23 implieds are pricing in a potential move of about 3.3% for BAC stock. This places the upper bound at $16.27, while the lower bound lies at $15.23. With current support/resistance levels coming in at $15.50 and $16, respectively, a move beyond either of these bounds could confirm an uptrend or signal a short-term reversal for BAC stock.
2 Trades for BAC Stock
Call Spread: Traders looking for a bullish reaction to next week’s FOMC might want to consider a weekly Sep 23 series $16/$16.50 bull call spread. At last check, this spread was offered at 13 cents, or $13 per pair of contracts. Breakeven lies at $16.13, while a maximum profit of 37 cents, or $37 per pair of contracts, is possible if BofA closes at or above $16.50 when weekly Sep 23 options expire at the end of next week.
Put Sell: If an aggressive short-term options play isn’t really your style, you might want to consider an Oct $15 put sell. At last check, this put was bid at 34 cents, or $34 per contract. The upside to this put sell strategy is that you keep the premium as long as BAC stock closes above $15 when these options expire. The downside is that should Bank of America trade below $15 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $15 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
