Bank of America Corp. (NYSE:BAC) stock is going to $30. It likely won’t happen in the next month or two, but BAC stock will hit $30 before the end of 2017.
It’s a bold statement, for sure. A $30 PT would mean a roughly 25% jump from current prices. But we are already seeing signs that the Trump administration is delivering on key campaign promises that specifically benefit the banking industry, including relaxing regulations on the financial industry and sounding the death knell for the Dodd-Frank Act — all of which is a boon for BAC stock.
What’s more, interest rates are moving higher — sooner rather than later. Many pundits on Wall Street claimed another rate hike wouldn’t arrive until late 2017, at the earliest, because economic growth wouldn’t allow the Federal Reserve that much leeway.
But jobs data and other reports have indicated exactly the opposite. So much so that Fed Chairwoman Janet Yellen told the Senate Banking Committee yesterday that rates could be rising sooner rather than later. In fact, Yellen told the committee that a March rate hike was definitely “on the table.”
Another rate hike this soon would be music to BofA traders’ ears, as it means higher revenue. And Bank of America stands to gain much more from this than peers like JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C). Specifically, BofA has a much heavier focus on U.S. consumers than its competitors, and the banking giant has rather large holdings in rate-sensitive mortgage securities. This means Bank of America’s fortunes are much more closely tied to U.S. interest rates.
The next two-day policy meeting for the Federal Open Market Committee is slated for March 12-14, and BAC stock traders should be ready to take advantage of a melt up in sentiment for the shares.
One of the biggest potential sentiment drivers for BAC stock comes from the analyst community. Yes, the brokerage bunch is already quite keen on Bank of America, with Thomson/First Call reporting that 24 of the 33 analysts following the stock rate it a “buy” or better.
But the upside potential comes from the 12-month consensus price target, which rests at $24.86 — just 3.3% north of BofA’s current perch. With rates and Bank of America’s revenue set to rise, price-target increases should be in the stock’s future.
BAC options traders are already preparing for a continued rally, with a focus on a positive outcome from the March Fed meeting.
And that’s where I’m eyeballing a pair of trades.
Currently, the March put/call open interest ratio for BAC options rests at 0.38, with calls nearly tripling puts among options set to expire within the next month. The biggest March call targets are the $125 and $127 strikes, with 179,000 and 112,000 contracts in open interest, respectively.
Click to Enlarge Additionally, March implieds are pricing in a potential move of about 5.25% for BAC stock through expiration.
This places the lower bound at $22.74, which BAC should come no where near baring a major event in the financial markets, and the upper bound at $25.26, well above the current consensus 12-month price target.
2 Trades for BAC Stock
Call Spread: Traders looking to play the March Fed meeting might want to follow the prevailing winds in the options pits and consider a March $25/$27 bull call spread.
At last check, this spread was offered at 22 cents, or $22 per pair of contracts. Breakeven lies at $25.22, while a maximum profit of $1.78, or $178 per pair of contracts, is possible if BAC stock closes at or above $27 when March options expire.
Put Sell: For those looking for a more stable return, a March $22 put sell may fit the bill. At last check, this put was bid at 11 cents, or $11 per contract.
The upside to this put sell strategy is that you keep the premium as long as BAC stock closes above $22 when these options expire. The downside is that should BofA trade below $22 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $22 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.