When I last checked in with Bank of America Corp (NYSE:BAC) on Nov. 1, BAC stock was trading near $16.50 and the Federal Reserve was just about to announce its first interest-rate hike of 2016 — its second of the past decade. The hike came as expected, and the Donald Trump rally rolled onward, carrying BofA shares to levels last seen in 2008.
The question now is, “How much higher can BAC stock go?”
Click to Enlarge Technically speaking, Bank of America shares are trading in overbought territory. In fact, BAC stock has been overbought since mid-November, just after the Fed rate hike.
The shares are showing some signs of weakness in the $23 region, which should lead to a period of consolidation or profit taking. As the old saying goes, what goes up must come down.
But there is also a quote from John Maynard Keynes that is quite applicable here: “The market can remain irrational for longer than you can remain solvent.”
If you’ve got the wherewithal and the funds, betting against BAC stock here — at least over the short term — could be profitable. But what does the sentiment backdrop say about Bank of America’s prospects?
According to Zacks data, ratings from the brokerage community have edged higher, with 13 of the 19 analysts following BAC stock now rating the shares a “buy” or better, up from 12 in early November. And there are still no “sell” ratings to be found. The consensus price target is also higher, up from an average of $17.95 on Nov. 1 to $22.03 at last check.
With BAC stock trading just shy of $23, the brokerage bunch has a choice: downgrade BofA to “hold” and keep price targets where they are, or lift targets to match the stock’s current trajectory.
Short-term BAC options traders appear to be leaning toward the former. Specifically, the January 2017 put/call open interest ratio for BAC stock rests at 0.88, and has actually risen during the past week as puts are being added at a faster rate than calls.
Taking a closer look at January OI reveals heavy put OI at $22 (164,000 contracts) with peak put OI at $17. Call traders, meanwhile, are more reserved, with heavy call OI at $22 (231,000 contracts) with peak call OI at $20 (284,000 contracts).
This lack of out-of-the-money call conviction from options traders, plus the rising interest in BAC puts, could be a warning sign of consolidation or profit taking on the horizon.
Overall, January 2017 implieds are pricing in a potentially sizable move of about 6.7% heading into expiration. This places the upper bound at $24.54, while the lower bound lies at $21.46.
2 Trades for BAC Stock
Put Sell: Honestly, betting bullish on BAC stock right now makes even me a bit squeamish. The shares are overbought, Trump has yet to take office, and the Santa Claus rally is sure to take BAC marginally higher heading into the new year. The potential for profit taking is high after the holiday break, and Trump rally has to end sooner or later.
Still, I’m not willing to bet directly against BAC as my main play — thank you Mr. Keynes. As such, traders so inclined might want to consider a Jan 2017 $20 put sell to take advantage of technical support. At last check, this put was bid at 10 cents, or $10 per contract.
The upside, as usual, is that you keep the premium as long as BAC stock closes above $20 when these options expire. The downside is that should BAC trade below $20 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $20 per share.
Put Spread: Those traders daring enough bet on a reversal and a round of profit taking might want to look at the Jan 2017 $21/$22 bear put spread. At last check, this spread was offered at 27 cents, or $27 per pair of contracts. Breakeven lies at $21.73, while a maximum profit of 73 cents, or $73 per pair of contracts, is possible if BAC stock closes at or below $21 when January options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.