Bank of America Is a Bargain Heading Into Earnings

Bank of America is poised for a rally heading into next month's earnings report. It's time to go bargain hunting with BAC stock.

It’s easy to miss in the midst of all the noise on Wall Street right now, but earnings season is just around the corner. Banking stocks will be among the first to release their quarterly results, and that means it’s time to look at Bank of America (NYSE:BAC) once again.

There are plenty of reasons to be bullish on BAC stock. The Federal Reserve is sticking to its plan to hike interest rates three times in 2018. However, the recent strong May employment report and additional economic factors could mean that the Fed throws in an additional rate hike. This would bode well for Bank of America’s investment unit, as higher rates mean more revenue.

Bank of America should also benefit from the rising number of mega-corporate buyouts hitting the Street. After the Department of Justice approved AT&T Inc.’s (NYSE:T) buyout of Time Warner, the floodgates are open for additional mega-mergers — especially among media companies and content providers. This also means more potential revenue for Bank of America, which underwrites quite a few such deals.

We’ll get a look at Bank of America’s (likely improving) fundamentals next month on July 16 when the banking giant releases its second-quarter earnings report. Currently, analysts are expecting BofA earnings to rise 34% from 46 cents per share last year to 62 cents per share. Revenue is expected to remain relatively flat at $23.1 billion.

BAC Stock
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Turning to BAC stock’s technical backdrop, this recent market drop sets up bullish investors perfectly. BAC is at the lower rail of an ascending wedge formation. In short, the shares have staged an orderly pullback to support near their 200-day moving average in the $29 region.

Yesterday’s plunge pushed BAC stock below this key trendline, but the last such occurrence (in September 2017) preceded a massive run higher for the shares. Once the market stabilizes from the recent trade war fears, I expect BAC to rally higher once again as bargain hunters move in ahead of next month’s earnings.

In the options pits, BAC stock options traders remain optimistic on the equity’s prospects.  Currently, the July put/call open interest ratio checks in at 0.54, with calls nearly doubling puts among those options most affected by Bank of America’s quarterly report.

Overall, July implieds are pricing in a potential post-earnings move of about 5.6% for BAC stock. This places the upper bound near $30, while the lower bound lies at about $27.

2 Trades for BAC Stock

Call Spread: With BAC stock set to run higher in the wake of the recent market pullback, traders might want to consider a July $29/$29.50 bull call spread. At last check, this spread was offered at 20 cents, or $20 per pair of contracts. Breakeven lies at $29.20, while a maximum profit of 30 cents, or $30 per pair of contracts is possible if BAC stock closes at or above $29.50 when July options expire.

Put Sell: Alternately, if you’re looking for a more conservative play on BAC stock, a July $26 put sell has a high probability of finishing out of the money. At last check, this option was bid at 11 cents, or $11 per contract. As usual with a put sell, you keep the premium as long as BAC stock closes above $26 when July options expire. On the downside, if BAC trades below $26 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $26 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities. 

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