For investors wanting to make better use of a “Trump Put” in Bank of America Corp (NYSE:BAC) with less risk, I have a trade on BAC stock that offers some excellent bang for your buck.
After several weeks of digesting fairly aggressive, post-election idealism inspired by the election of President Donald Trump, the “Trump Put” came back last week. This allowed BofA to break out of its chart ennui to a fresh nine-year high.
Investors collectively voted that BAC stock is going to be great again, backed by fresh optimism of financial deregulation, fabulous tax breaks, fiscal spending on infrastructure and reflation that will prove perfectly suitable for the U.S. banking system.
What could possibly go wrong?
Maybe a lot.
For one, fickle investors could always grow wary of the administration’s protectionist trade agenda. Alternatively, maybe it will be obstacles for Trump’s “phenomenal” tax plan that will prove to be the undoing for both the market and Bank of America.
To be honest, it’s impossible to know in advance what will drive the market lower. It could be anything.
Maybe for now, we should just look at Bank of America’s chart.
BAC Stock Chart
Click to Enlarge Bank of America broke out last week from a flat base that was nearly two months long. The much-needed consolidation pattern developed following a quick, overbought rally punctuated by stochastics and price action piercing the upper Bollinger Band.
The price action has been quite favorable; BAC stock is up about 4% since the breakout. But bulls now face a couple of secondary warnings that indicate a loss of momentum.
Weekly stochastics have continued to weaken with divergent behavior during the rally. At the same time, both the daily and monthly stochastics (not shown) are positioned in overbought territory and beginning to signal bearish crossovers.
The Trump-inspired rally in BAC stock looks vulnerable to stalling, and shares could reverse back toward a test of the base.
That brings us to our trade.
How to Trade Bank of America Here
Given the technical signs that BofA’s rally might be faltering, and given that the stock is prone to challenging its recent breakout pattern for support, I like the idea of a modified, short-term long put butterfly for positioning.
I suggest the 10 Mar $24/$23.50/$22.50 put butterfly, priced for a debit of just 1 cent with shares at $24.52.
For a penny, or $1 per spread — as close to “no cost” as one can get — the trader maintains a bearish position in BAC stock with an expiration profit range from $23.02 to $23.98. That’s some bang for your buck.
The sweet spot where profits of 49 cents are maximized is $23.50. That level lines up quite nicely with the flat base’s high of $23.55. As discussed, that area is where we might expect some technical testing to occur. At the same time, it might allow a more supportive stochastics picture to take hold.
Were a larger correction to occur in Bank of America, the trader’s downside breakeven is $23.01 — inside the congestion area just above the 50-day simple moving average. The max loss of 51 cents would occur if BAC stock falls below $22.50 at expiration and the position is closed through automatic exercise and assignment.
By purchasing stock in this type of price decline while exiting the butterfly, an investor effectively would enter BAC stock at a discount of at least 6% to today’s prices.
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.