Banking on Pre-Earnings Strength in BAC

With covered calls, we can collect when the market stalls

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Two weeks ago, we recommended you sell a put write on Bank of America (NYSE:BAC). We were excited about the strong jobs numbers from November and the impact they might have on consumer spending and economic growth in the United States.

We’re still excited about all those things, but we’re also excited about the first phase of the trade deal the U.S. has reached with China. Seeing Dec. 15 come and go with no new tariffs being implemented put everyone on Wall Street in a buying mood.

The S&P 500 closed above 3,200 for the first time last week, and the bullishness played out particularly well in our trade on BAC. The stock shot higher on Thursday, Dec. 12, after the trade deal was announced, and it hovered around $35 last week. We bought back our old put, and now we’re selling a new one.

It’s Still All About Interest Rates

Right now, banks are able to borrow money at incredibly cheap rates because the Federal Reserve has cut short-term rates so low. And now that longer-term rates are rising, banks are able to charge more for the money they lend.

The difference between what the bank pays to borrow money and what the bank charges to lend money is its net interest margin. Traders seem to be banking on BAC enjoying higher net interest margins heading into 2020.

When we mentioned this in our last BAC recommendation, the CBOE 10-Year Treasury Yield Index (INDEXCBOE:TNX) was at around 1.85%, but as you can see in the chart below, the TNX has been heading higher.

Daily Chart of CBOE 10-Year Treasury Yield Index (TNX) — Chart Source: TradingView

Specifically, the TNX has been making higher lows since it found a bottom in September. The TNX doesn’t technically track interest rates, but it does have a direct relationship with long-term rates, which is why we use it to measure whether or not interest rates are heading higher.

According to its projection materials, the Fed doesn’t plan on raising rates in 2020, which means overnight borrowing for banks will still be cheap. As long-term rates continue to climb, banks — including BAC — will continue to earn more money.

Hovering Around $35

As mentioned above, BAC hovered around the $35 level last week. It pushed above $35 per share several times, but it couldn’t sustain its momentum.

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

If you look at the chart above, you can see that BAC was consolidating briefly before its trade-related breakout. The top of that range was around $33.50, which means it could act as support if BAC drops down. That potential support level would also make a great strike price for short options.

But when picking an expiration, remember that the banks always kick off earnings season. BAC will report earnings on Jan. 15, so be sure to pick an expiration before then. Even a good earnings report can lead to selling. Investors want to take their profits and move into new positions, and that can push a stock lower.

Stick with weekly expirations in early January to avoid any earnings-related complications.

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


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/banking-pre-earnings-strength-bac/.

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