Bank of America Corp (NYSE:BAC) has fallen from recent highs ahead of Tuesday’s first-quarter earnings report. However, if we zoom out to a more long-term view, it becomes clear that the recent dip in BAC stock is nothing more than a blip.
Click to Enlarge After Bank of America’s monstrous run, it’s only natural to think that BAC has gone too far too fast. But even at these altitudes, BofA is very humble in value — its price-to-earnings ratio is under 15, and it’s selling just under book value.
So fundamentally, not most experts would agree that Bank of America is not expensive. Consequently, those who are long the stock are not weak hands. They are likely to stick with it through the short-term dips. Sure, there is risk from the potential of a market-wide correction but on its own, any weakness in BAC stock should present opportunities to go long the stock.
Technically, the recent price action leaves Bank of America stock vulnerable to a potential 6% dip to under $21 per share. And given the current macroeconomic environment, I bet that dip would invite a lot of buyers.
But it’s daunting to jump the gun and commit to going long BAC right before earnings at the stock’s current face value.
Luckily, we have options, so we can structure a trade that allows a lot of room for error.
How to Trade BAC Stock Right Now
The bet: Sell the BAC Jan 2018 $17 put for 50 cents per contract. This trade has an 85% theoretical chance of success. I need Bank of America shares to stay above $17 for a complete win.
Usually I like to balance my trade by selling upside risk, but in this case I will refrain from doing so. Given that I don’t mind owning BofA at $17, and given the price buffer, I am willing to be un-hedged long at my chosen level.
Selling naked puts in this environment can be risky, especially if I am not able or willing to own BAC shares at $17. So for a tamer version of this trade, I’d sell a credit put spread instead.
The alternate: Sell the BAC Jan 2018 $17/$15 credit put spread, where I have the same chance of success, yet still yield 13% on money risked.
I am not one to chase price targets. But those who foresee a rally in BAC stock can potentially increase profits by buying a near-the-money May debit call spread. Then, they would be long Bank of America stock virtually for free. As long as BAC stays above the sold puts, any premium they recover from selling the debit calls spreads would be pure profit.
Learn options as easy as 1-2-3 here. 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.
