The last article I wrote on Bank of America Corp (NYSE:BAC) was a beautiful win. Thanks to a predictable range, I have so far been able to find areas against which to sell risk that have expired for maximum gains. I sold bullish put spreads to buy calls and the timing was near perfect.
When done properly, selling options risk creates income out of thin air. Today, I want to reset for another run at a potentially fruitful pair trade with Bank of America stock into 2017.
Click to Enlarge Although banks are back in favor with traders, they have been unable to overcome the ranges.
The Financial Select Sector SPDR Fund (NYSEARCA:XLF) is trying to overcome a long-term pivot. The monthly chart shows that XLF has been trading around this pivot since 1999.
An encouraging fact for the bulls are that recent earnings reports from high profile financials like Goldman Sachs Group Inc (NYSE:GS) and Citigroup Inc (NYSE:C) were well received by Wall Street. Some even show more upside promise. Technically, the XLF and BAC have higher lows knocking on resistance levels which often resolve to an upside break.
Take GS for example: Technically, it may have started a rally with upside pressure to $181-plus per share even after having rallied 20% since the June lows. Furthermore, the shorter-term XLF chart also is technically bullish and could support the notion of more upside for banks even from here.
Bank of America stock specifically is not so obviously bullish. I also see potential resistance for the next few weeks. Conversely, I don’t see downside pressures to retest the lows.
So, I can reasonably expect a meander period for the near future. This translates into potential zone within which Bank of America stock will trade. I can sell risk against this range.
Trade #1 – The Bet: Sell the BAC Dec $15/$14 credit put spread. This is a bullish trade for which I collect 12 cents per contract. This trade would yield 13% on risk. The 8% price buffer gives it a 80% theoretical chance of success.
I almost always like to hedge my risk. Usually I set the pair trade as an iron condor. In this case, I will stagger time instead. 
Trade #2 – The Hedge: Sell the BAC Jan $18/$19 credit call spread. This is a bearish trade for which I collect 15 cents per contract. If successful, the trade would yield 17%.
Ideally, I need Bank of America stock to stay above $15 per share through December and below $18 per share through Jan expiration. So the buffer from current price is -8% and +9%. Theoretically this trade has just under an 80% chance of success.
Trade #3 – The Twist: I want to add another bearish trade with a tight stop. Depending on price action, I may not hold it through expiration. Sell the BAC Dec. 2 $17/$17.50 credit call spread. This is a bearish trade for which I collect 15 cents per contract. If successful, the trade would yield 40%. The theoretical chance of success is lower than my ideal but I do have a bearish mid-term view on markets. it is important to note that this trade is set to expire before a rate hike announcement.
I am not obliged to hold the trades through expiration. I can close any of them for partial gains or losses at any time. In a headline-driven market I use tight stops.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
