A hike and punt pattern followed by a caution flag mean it’s time to position in Bank of America Corp (NYSE:BAC) for a bit more downside. And once more, even if you’re going to switch sides later on, an out-of-the-money long put spread is the right option to play right now. Let me explain.
It has been all downhill, or more aptly, it’s been a “hike call” then a punt downfield in BAC stock since last month’s Federal Open Market Committee meeting delivered a nearly written in stone, third 25 basis point increase to rates.
In the days following the rate increase, maybe disappointment over a less hawkish Federal Reserve and Bank of America investors possibly feeling they overshot on “how much and how quickly” has led to a more defensive line coming out onto the playing field for ‘da bulls.
If you’re wondering why BofA stock has tumbled lower, fingers could be pointed at an exhausted (figuratively and literally) Trump Rally. Bullish market action relying heavily on pixie dust and blue skies turned toxic after Donald Trump’s, (“Wrong, False!! It’s Ryan’s!”) American Health Care Act was declared d.o.a. late last month.
The AHCA fallout as it relates to BAC stock, as well as the broader market, has introduced a new and more bearish narrative. Investors are now grappling with other campaign promises such as lower corporate taxes and other economic growth plans being compromised.
BAC Stock Daily Chart
When I last wrote about BAC stock it was back on March 14 in front of the Fed meeting. The focus was on shorting the banker based on a priced-for-perfection situation both off and on the weekly price chart.
The analysis proved prescient, with shares of Bank of America falling as much as 12% at their recent low and generating a nice profit for a discussed below-market, long put spread.
Now and as the BAC daily stock chart shows, following the hike and punt pattern, a bearish caution flag has come into play. And that points to even lower prices ahead for Bank of America.
Stationed below resistance from BAC stock’s former flat base, as well as the 50-day simple moving average, I suspect a move below last week’s 14% corrective low could eventually find BofA trimming an additional several percent down to $20.50 — $21.
For traders agreeable to shorting shares, a money and technical stop above $24.14 looks reasonable and as I’ve annotated on the price chart. An alternative and favored position would be to also use a bearish put spread.
BAC Stock Bear Put Spread
Given what’s been discussed and with earnings later this month, I like the defined risk and reduced Greeks a bear put spread in BAC stock offers traders. Reviewing Bank of America’s options, the 5 May $23/$22 put vertical is priced for 27 cents with shares of BAC stock at $23.48.
If shares of Bank of America remain above $23 over the next month and no action is taken during this period, the trader losses the full debit. The upside is risk is limited to the 27 cents no matter how potentially wrong our outlook might be.
Personally and if given the opportunity, I’d look to take a smaller loss if the described adverse move in BAC stock above $24.14 occurred or if the spread collapsed by 50%.
On the downside, at expiration a break-even of $22.73 is 3.2% below the current share price of BAC. And for the trader to bank some real profits? That would require additional testing of the recent low and challenge of base support near $22. If that were to occur, the result would be profits of 73 cents if shares of Bank of America closed below the sold $22 strike on May 5.
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.
