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Bank of America Corp Is Red Hot, But Don’t Get Burnt!

There’s a better way to steal profits and buy BAC stock more affordably using options

By Chris Tyler, InvestorPlace Contributor

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Bank of America Corp (NYSE:BAC ) looks as good today as it did poorly in the aftermath of the financial crisis. For risk-averse investors, however, a modified fence strategy still looks more compelling than outright buying BAC stock. Let me explain.

It’s good to be a BAC stock investor these days. Entering 2018 the company is set to capitalize on an opportunistic loan environment with steadily rising interest rates. There’s also the Trump administration’s Tax Cuts and Jobs Act that’s not going to hurt a company like Bank of America. But that’s not all.

BAC stock is also likely benefiting from optimism Trump’s almost forgotten infrastructure projects will now finally see the light of day. Also, recent approval from the Fed allowing the banking giant to repurchase an additional $5 billion in stock has lent a hand in sending shares of BAC to multi-year highs and levels last seen during the dizzying financial crisis circa 2008.

Bottom line, along with a friendly-looking BAC stock chart, the only item absent for Bank of America investors buying shares today is a toaster with that purchase … but don’t think getting burnt isn’t still possible.

BAC Stock Daily Chart


Click to Enlarge 
For the bulk of 2017, BAC stock was more foe than friend to bulls and bears as a loose cup-shaped base teased traders with price action bouncing around the 50-day simple moving average.

Perversely enough, the tricky behavior ended with an equally difficult bear trap set in early September. BAC stock reversed course out of “bear territory” and a first breach of the 200-day simple moving average in more than a year, then proceeded to break out of the cup-shaped base and add on a total of 30% in less than four months.

So what’s next for BAC stock? While the technical trend is clearly up entering 2018, and the conditions off the chart suggest more gains for shareholders, I can’t help but be reminded of periods causing doom-and-gloom overtures and how well those played out.

As much and at a minimum, if traders are intent on being optimistic, a limited and reduced-risk options strategy is stressed.

BAC Stock Modified Fence   

One strategy that looks attractive for bullish BAC stock traders and given our cautious view on shares, is a modified fence. The bullish strategy limits and reduces risk by purchasing a call vertical and selling a put vertical in the same contract month to finance the position.

The primary objective is for the call spread to go fully in-the-money. This allows the trader to capture the max profit of the combo. But there’s an added bonus too. If BAC stock falls dramatically, the limited loss structure of the vertical offers a nice buying opportunity to purchase shares at a considerably lower price versus a stock trader simply trying to average in over time.

Reviewing BAC’s options and shares at $29.88, one favored combination is buying the March $32/$33 call spread packaged with selling the March $28/$27 put spread for even money.

This particular modified fence enjoys a couple months of play, a mid-January earnings catalyst and the opportunity to capture up to $1 in profit above $33 or put the trader in a much better position to buy shares at a nice discount with defined risk.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/bank-of-america-corp-is-red-hot-but-dont-get-burnt/.

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