Collecting More Income From Bank of America

Financial stocks could consolidate for a while

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We are recommending a new trade on Bank of America (NYSE:BAC). There has been some volatility in the market this week, so we think this is a good time to sell some covered calls for short-term income.

According to the CME FedWatch Tool, there is a 73.9% chance of a rate cut at the Federal Open Market Committee’s July meeting, and a 26.1% chance of a “double” rate cut. Generally, cutting the overnight rate will lead to lower interest rates overall, which would start to cut into the profits of financial stocks like BAC, though some monetary easing may benefit the stock over the next few months.

Regardless, BAC is struggling to rise after its drop in late May, which is why we picked it for this covered call strategy.

Single Rate Cut Versus Double Rate Cut

St. Louis Federal Reserve President and CEO James Bullard’s comments yesterday threw some cold water on the prospects for a “double” rate cut of 0.5% in July. In an interview with Bloomberg, he said a 50-basis point reduction would be “overdone.” Because the market has priced in a 50-point rate cut, his comments created a little volatility in yesterday’s session.

However, in his comments, Bullard said he was “willing to go to 25.” A 0.25% rate cut in July is still bullish for the market, but it isn’t drastic enough to indicate the Fed feels the economy is in real trouble. It also keep interest rates up enough for banks to turn a profit.

In the intermediate term (3-6 months), we are confident some mild monetary easing will steepen the yield curve and actually provide support to the financial sector. A “single” cut to the overnight rate in July should be enough easing to help BAC for now.

Consolidating below $28

BAC has recovered since its drop to around $26.50 in late May, but it encountered some resistance at the $29 level last week. We are generally bullish on the stock, which is why we don’t mind holding it in our portfolio, but we do expect it to consolidate below $28 in the intermediate term.

BAC may even drop back to support in the $27 range before breaking above resistance. By selling a covered call, we can collect extra income while we wait for the stock to recover.

Daily Chart of Bank of America (BAC) — Chart Source: TradingView

But if the stock rises, we will have an opportunity to harvest income from the short calls. We can buy them back at a lower price, hold on to our BAC stock and sell another covered call for more income.

To find out which BAC puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today. 

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of, as well as the co-editors of Strategic Trader.

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