If you were a bit concerned about Bank of America (NYSE:BAC) before earnings, you weren’t alone. But following Monday’s performance, off and on the price chart BAC stock looks ready for a well-placed, modified bullish spread combination.
I’ve said it before and it deserves repeating, sometimes one day can make all the difference. And that appears to be the case in BAC stock.
Off the price chart, back-winds of corporate tax cuts, conducive interest rates and favorable regulatory environment coupled with internal cost-cutting measures manifested themselves into a better-than-expected profit report for Bank of America.
On the price chart, the situation looks equally supportive for shareholders to line their own coffers following an important and lengthy technical incarceration from which BAC bulls can break out of. Let me explain.
BAC Stock Weekly Chart
Following earnings Monday, technically speaking BAC stock is offering bullish investors nice value. The weekly chart shows shares have managed to shake off a false breakdown from a multipoint bottom which failed to hold pattern support near $28.50. This should be very good news for bulls.
Simplistically, it often takes a significant-looking failure like the one in BAC, where the last remaining holders throw in the towel in technical disgust, before the real move occurs. As this lengthy consolidation has formed on top of the 62% retracement level dating back to BAC’s 2006 all-time-highs, this seems all the more relevant. And with BAC stock sporting a favorable oversold stochastics set-up, it’s our contention that Bank of America’s current technical incarceration will eventually give way to a successful breakout.
BAC Stock Bullish Modified Spread
Given our bullish outlook that BAC stock is moving higher and will break out of its weekly consolidation, I don’t like the idea of short-changing the upside potential just yet. Additionally, believing staunch support is in place, opening up a bit of downside exposure for the right price seems reasonable.
Reviewing BAC’s options, one strategy which aligns itself with our technical view is a bullish combination which sells an out-of-the-money put spread to finance a long call. Specifically and with shares at $29.80, selling the Nov $29/$28 put spread and purchasing the Nov $33 call for a debit of 5 or 6 cents or less looks interesting.
Ultimately, this isn’t a freebie. First, there is a very small debit being paid versus taking in income. Secondly, this combination forfeits one quarterly dividend. Lastly, below $29, this position’s risk grows from a few pennies to $1.05 before the stock exposure is capped beneath $28 in BAC.
But for like-minded investors anticipating growth in BAC stock, this spread is well-positioned. First, the $33 strike call is lined up with an eventual technical breakout in BAC stock. Additionally, the November contract allows for a decent amount of time relative to the existing price pattern for this kind of price move to occur.
What’s also nice is if BAC is slow to rise to the occasion, so to speak, this combination holds next quarter’s earnings event in late October to act as a positive catalyst. And as the spread also maintains a couple extra weeks of life after the report’s release, there’s even more reason to like the looks of this bullish combination.
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.
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