The buying revolution in financial stocks has been a sight to behold. Bulls have piled into bank stocks across the land ahead of higher interest rates and profits. It’s a wonderful example of the forward-looking nature of markets. Bank of America Corp (NYSE:BAC) stands front and center among the beneficiaries of the buying binge. BAC stock has gained a cool 23% since Election Day.
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A cursory glance at Bank of America’s stock chart reveals two facts:
- First, BAC stock is now in a rousing weekly uptrend.
- Second, it is insanely overbought in the short-run.
Because of the latter fact, would-be buyers have been sending prayers for a pullback to the market gods for days now. Thus far, answers have been absent and spectators have been relegated to either chasing BofA shares or watching the profit-fest from afar.
I suspect, however, patience will finally pay this week. Profit-taking has seized Bank of America stock in early morning trading Monday, so here’s to hoping sellers can cobble together a multi-day downturn.
In light of the epic weekly breakout scored during the post-election buying frenzy, any and all dips in financial stocks demand to be bought.
That brings us to today’s tantalizing trade in BAC stock.
A Naked Put for BAC Stock Buyers
One of the beauties of the options market is the ease with which traders can reduce their stock purchase price. Stock traders looking to buy at a discount typically use limit orders.
For example, if you’re a willing buyer on a dip to $20, you could place a buy limit at $20. If the stock never drops to $20, you won’t have to buy. If shares do drop to $20, you get to grab them at a small discount from the current price.
With options, we can take it a step further by getting paid for our willingness to buy BAC stock at a discount. By selling the Jan $20 put option. you promise to buy 100 shares (per contract) at $20 if the stock sits below that price at expiration. But since you receive around 60 cents right now for selling the put, your effective purchase price would be $19.40.
And, bonus, if the stock ends up above $20 at expiration the put will expire worthless allowing you to pocket the $60 of premium (60 cents x 100).
Bottom line: If you want to get paid for your willingness to buy BAC stock at around $19.40, sell the Jan $20 puts.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
