Two days into a dreamy-eyed relief rally and opportunity knocks for bearish traders in Bank of America Corp (NYSE:BAC). But rather than shorting shares, positioning with a moderately bearish put butterfly may come in very handy if recent trends in BAC stock are any indicator. Let me explain.
The last time I wrote about Bank of America, the focus was on Warren Buffett’s whale-sized and attractive long position in BAC stock. Armed with a favorable-looking chart, the situation looked decent for buying into the name. More importantly, BAC was determined to be better-suited for an options strategy equipped with its own type of margin of safety.
It turned out the period wasn’t entirely kind to Warren’s massive stake. But with a cost basis of $7.14 on 700 million shares, there shouldn’t be any tears directed at the modest paper loss in BAC for Buffett’s Berkshire Hathaway.
And despite our own technical misstep, don’t cry for us either. At its worst and as addressed last time, a decline of about 8% in BAC stock may have turned into a much stronger buying opportunity for bullishly inclined investors down a scant 0.50% with our detailed strategy.
BAC Stock Daily Chart
When looking at the daily chart of BAC stock, I can’t help but think the trend has not been anyone’s friend in 2017, expect maybe those traders focused on the non-directional variety.
Most recently, the difficult price behavior worked as a quick rebuttal to my mildly bullish defense of BAC stock. Back in mid-August I wrote shares were moving nicely within a modest but fairly steady up-channel inside of 2017’s chop-n-slop action.
As denoted by the yellow oval on the price chart of BAC, the timing of my technical call couldn’t have looked any sillier. Since then, shares have fallen back inside this year’s chop and into a slighter downtrend.
The bearish price action in Bank of America has featured a pair of technical failures against the 50-day simple moving average and a now non-supportive channel acting as resistance.
So, what’s next for BAC stock? With shares facing pattern resistance once more, a short position which fades the rally of the past two sessions seems reasonable. But like last time, my advice is if you’re going to position, using a butterfly still makes a good deal of sense.
BAC Stock Moderately Bearish Butterfly
Given BAC’s spotty track record in 2017, but still seeing an opportunity for lower prices, a bearish-positioned long put butterfly offers a way to play BAC from the short side with reduced and limited-risk compared to shares.
Reviewing BAC’s options and shares at $23.97, one favored butterfly is the Weeklys Oct 6 $23.50/$22.50/$21.50 put combination for 17 cents.
What does that offer traders? For 0.7% of equivalent stock risk, the butterfly offers a decent-size profit range from $21.68 to $23.32 at expiration. And if BAC landed squarely at $22.50, the max profit of 83 cents could be captured for a return approaching 500%.
On either side of the outer strikes, the small debit is forfeited as both the embedded spreads collapse to zero. Again though, if BAC stock moves counter to our immediate technical outlook, the trader is in fairly decent shape to consider a second attempt at fading the move, if the inclination is still there.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!