So far, 2018 has been a whipsaw year for stocks, but that’s mostly due to sentiment. The proof is that we are still setting all-time highs in indices. This has been mostly a crisis of sentiment. Inflammatory tariff headlines have caused a few market tizzies but in the end, the equity bulls remain in control.
The fundamentals are still solid across most equities yet most investors are hesitant to buy with both hands. This is mostly true in financial sectors. Stocks like Bank of America (NYSE:BAC) have failed to hold a rally more than a few hours.
As a result we now have tremendous value in these mega money centers. The 2017 meme that higher rates will best benefit banks has turned into fears of a flattening curve.
Wall Street is now convinced that banks need a good spread between short- and long-term rates. I think that they have already had so many other advantages to still be winners. Much less red tape and lower taxes will keep this value trade from collapsing.
Yes, BAC stock is a good value, but that doesn’t mean it will rally much farther. This morning, management reported decent earnings results and the stock is so far higher. The challenge is to hold the greens and extend on them.
The results are not clearly as good as JPMorgan Chase (NYSE:JPM), but they are solid nonetheless. Unlike Wells Fargo (NYSE:WFC), BAC management delivered quality results, so they did not give the bears reason to sell BAC stock from their executions on plan.
Today’s trade will profit, even if the naysayers are correct in saying that BAC stock is a value trap. I don’t need a rally to profit with this trade. In fact, I can still hold my maximum gains even if BAC falls another 10% from here. Instead of buying BAC shares outright by perfectly timing the market, I sell downside risk against proven support and let time and value do the heavy lifting.
I am a winner as long as the equity markets don’t crash in 2018. Even then, the worst case scenario is that I own shares of BAC but at a heavy discount from the current price.
Aside from the earnings beat, it is important to note that the BAC buyback program is in full tilt and the share count is down significantly. This fact alone provides support to my trade today.
How to Trade BAC Today
The Trade: Sell the BAC Jan 2019 $26 naked put and collect 75 cents to open. There is an 80% theoretical chance that I would retain maximum gains with this trade. But if the price falls below my strike, then I own the shares and would suffer losses below $25.25.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the BAC Jan 2019 $25/$23 credit put spread where the risk is limited. If the spread wins, it would deliver 15% in yield.
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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.
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