A yuuuge narrative in Bank of America Corp (NYSE:BAC) and other financials has lost a bit of steam in recent days. Nevertheless and as you’ll soon see, that’s a very good thing for shares … and even better if you’re willing to trade BAC stock.
Today, I have an idea for some financial engineering that won’t break the bank.
Following a massive rally spurred by President Trump-inspired idealism on everything from deregulation to a corporate tax boon to beneficial re-inflation conditions, BAC stock has gone nowhere very fast over the past few weeks.
Investors are now busy backtracking on a bit of the market’s notorious perfect pricing mechanism. That has put a lid on BofA. A newer, bearish narrative of protectionist policies and potential trade wars have been stealing the spotlight in recent days since the new administration took the reins.
At the end of the day, market narratives happen all the time. It’s the gray in-between area where history is eventually written.
Maybe Goldman Sachs knows what tomorrow, next week or the next four years look like, but it’s good to have an investment backstop — like options on BAC stock — rather than rely too aggressively on the “Trump put.”
BAC Stock Chart
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Admittedly, our prior technical case of BAC — prone to a corrective move into the $20-$21 area — proved too ambitious with a low of $21.77 for the period. But as both price and time are important factors in determining a correction; some good work has been provided in Bank of America.
Subsequent price movement in BAC stock has consolidated brisk gains of around 35% to establish a neutral, but constructive seven- to eight-week flat base pattern. So while the depth of BofA’s correction came up short of our forecast, the duration spent and firmness of the bid suggests the upside outweighs the downside risks at this juncture.
Now, for the trade.
How to Trade BAC Stock Here
Given the continued supportive dynamics working hard to make BofA great again, and the removal of earnings risk, I like a modified collar combination right now.
Sell an Apr $25 call and buy the Apr $22/$20 bear put spread for $23.10, as of BAC’s current price of $23.02. A bullish investor maintains about 8.5% of upside into April expiration with the sold $25 call capping profits at $1.90 per spread.
The max gain on BAC is unadjusted and on an expiration basis, with the potential for larger gains by rolling the position beyond the initial hedge.
On the flipside, if BAC stock fails to move higher and declines in price, the bear put spread portion of the combo affords the trader a partial but very effective hedge from $20-$22.
Under ideal conditions, the spread works to buffer the loss in share price, dollar-for-dollar. But even during a less agreeable price swing lower, this modified collar should greatly curtail downside risk on BAC stock — and in our view trumps other alternatives quite nicely.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
