Bank of America Corp (NYSE:BAC) has had a great quarter. Under President Donald Trump’s administration, banks are expected to thrive. Wall Street has been promised less regulation constraints which can liberate new levels of profits that have been tied up in red tape for years. In addition, the Federal Reserve is in the process of raising rates, with the expectation of three for this year. The idea is that higher rates will only help out BAC stock and other financial issues.
The debate among investors now: How much more room to the upside do bank stocks like BofA have?
I look at it from the opposite perspective. I believe the massive rally was an emphatic affirmation that the lower prices of financial stocks were flat-out wrong.
For almost a decade, markets had grossly underpriced bank stock prices. BAC stock specifically was the poster child of problem banks for a long while. Bank of America had to contend with the financial debacle and deal with the new regulatory hurdles. It also had the messes it inherited from assimilating the subprime lenders that the government shoved down their throats.
Now, Bank of America has a clean slate with a friendly presidential agenda. This allows Wall Street to reprice BAC stock based on fundamentals without much extra baggage.
I want to sell longer-dated risk below those levels and let time do the work for me.
How to Trade BAC Stock From Here
The trade: Sell the BAC Nov $18 put. This is a bullish trade for which I collect 35 cents per contract to open. I need BAC stock to stay above my strike sold to win. If Bank of America’s price falls below here, I’m committed to buying the shares at that price. The 30% buffer from current price is room enough to give this trade a 90% theoretical chance of success.
Selling naked puts is dangerous, and I only do it if I am willing and able to own BofA stock at the strike sold. To moderate the risk to suit smaller accounts, I can turn this trade into a sold spread.
The alternate: Sell the BAC Jan $20/$19 credit put spread. This is also a bullish trade for which I collect 16% yield on money risked. This spread has a slightly smaller buffer but still carries a healthy chance from current price.
Normally I like to balance my trades. In this case, I will rely on the natural price props under the stock. In addition, I chose longer-dated trades on purpose. Usually this allows for a relatively easy opportunity to manage around temporary pressures.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.