Yesterday, bank stocks fell 3% on a day when the markets corrected a little on fears over Italy’s bond market. Concerns there caused a spike in the U.S. bonds, which in turn caused the dip in the yields. Consequently bank stocks fell, and that was a mistake in my opinion, so therein lies the opportunity.
Companies like Bank of America Corp (NYSE:BAC) are already cheap. This is a mega bank with a bulletproof balance sheet and it’s only selling near book value with a teenaged price-to-earnings ratio. Yesterday’s huge drop was definitely not commensurate to the added risk that just happened.
Today I want the capture profits off of what others fear, as I believe those fears are unjustified.
The opportunity is too easy to pass up. This fits in line with my overall view of the stock market for 2018. I believe that the macroeconomic conditions still favor the bulls, absent new Black Swan events. Yes, we do have worries of tariff wars, but I believe that in the end, cooler heads will prevail as all parties involved have too much to lose.
NAFTA negotiations are also a worry, but there too all parties involved are better served if they come to terms one way or another.
The fundamentals of too many large companies are just too good to warrant another deep correction without a new shoe to drop. BAC sells at a 17 P/E ratio and 1.2 times book value so it will not be a financial mistake to own it especially if it is at a discount from current price.
So today’s strategy is to sell downside premium into what others fear but choose levels where I have proven support, so I wouldn’t even need a rally to profit. I merely need support to hold through 2018 so I can retain my maximum gains.
Click to Enlarge There are technical risks. BAC stock needs to hold current levels or it could trigger some momentum selling to retest $27.50 per share. This is not a forecast but a scenario that could unfold in the next few months.
Nevertheless, in the long term I believe that value will prevail in BAC stock. Experts on Wall Street agree. Most analysts rate BAC as a buy, yet it’s trading well below their average price target for stock.
BAC Stock Trade Ideas
The Trade: Sell the BAC Oct $26 put. This is a bullish trade for which I collect 65 cents to open. I have a 80% certitude that I will retain maximum gains. But if the price falls below my strike then I own shares. I would then need to manage off my breakeven point of $25.35.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the BAC Oct $26/$24 credit put spread. The spread has the same odds but would deliver 20% yield on risk. Neither trade requires a rally to profit.
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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 as @racernic on twitter and stocktwits.
