For most of 2018, the stock markets have been suffering from a slew of headlines about global tariff wars. Despite that, stocks are near all-time highs. Bank stocks in general have been under pressure though. They can’t hold a rally.
Bank of America (NYSE:BAC) stock is only up 4% for the year, but it’s not alone. The Financial Select Sector SPDR ETF (NYSE:XLF) is up less than 3%, while Goldman Sachs (NYSE:GS) is down 8%. There are a few winners like JPMorgan (NYSE:JPM) up 9% for the same period, but overall the bank trade has been difficult.
Luckily there is value in these stocks, and that has been a source of income for us all year. And therein lies the opportunity today.
There is a headline that should be hogging the media ticker tapes about rising rates. While all attention these days are on tariffs with China, the 10-year yield has been climbing steadily and sharply, especially in the last couple of days. The media will soon center their attention on this again. I say “again” because this was the original reason why the February correction started.
Rising rates is typically bad for stocks. Inflation is likely to heat up. Combined, they will ratchet up the rhetoric over the Fed needing to raise rates faster than planned. Bank stocks should benefit from rising rates.
Bank of America is a premier bank, and BAC stock should be leading the pack. Fundamentally, it is cheap selling at 14 price-to-earnings ratio and a 1.2 price-to-book. So owning shares at a 15% discount from the current price is not likely to be a financial debacle.
I am confident that in the long run I will manage out of them for a profit. The experts agree as BAC stock is still trading well below Wall Street expert price range.
Today’s trade in Bank of America stock doesn’t even need a rally to profit. I merely need for proven support to hold up through the end of the year. If not then I own the shares for cheap.
The reason I don’t want to buy BAC stock outright is because I’d risk my money without any room for error. I prefer using options so I can protect myself from vulnerable markets at these elevated levels. This way I create a buffer between the current price and my level of risk.
BAC Stock Trade Ideas
The Trade: Sell the BAC Jan 2019 $27 put for 40 cents. This is a bullish trade which does not require a rally to profit. Here I have an 85% theoretical chance of success. But I would accrue losses below $26.60.
Selling naked puts is daunting, especially in these high and uncertain markets. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the BAC Jan 2019 $27/$25 bull put spread. Here my risk is smaller, yet the spread would yield 13% on risk. Compare this with risking $30 to buy the shares and leave no room for error.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
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.