The Bureau of Labor Statistics (BLS) gave Wall Street the early Christmas present it was looking for last Friday when it announced the U.S. economy created 266,000 new jobs in November. But that wasn’t all. The BLS also announced that the unemployment rate dropped to a 50-year low of 3.5% and that wages rose by 3.1% from this time last year.
This news couldn’t have come at a better time for the bulls on Wall Street. They were already excited about the strong holiday shopping numbers they were seeing. Now they know those consumers are likely to have even more disposable income.
We want to take advantage of this bullishness with a put write on Bank of America (NYSE:BAC).
A Boost to Long-Term Treasury Yields
The bullish news has sent longer-term Treasury yields higher, which is good news for banks.
You see, the higher longer-term yields go, the more net-interest margin revenue the banks make. Right now, banks are able to borrow money at incredibly cheap rates because the Federal Reserve has cut short-term rates so much.
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.
Daily Chart of CBOE 10-Year Treasury Yield Index (TNX) — Chart Source: TradingView
As you can see in the chart above, the great employment data has sent the 10-Year Treasury Yield, as represented by the CBOE 10-Year Treasury Yield Index (INDEXCBOE:TNX), back up to 1.85% last week, and many analysts believe it could climb back up to 2% in the near term.
Using November’s Support as a Strike
As you can see in the chart below, $32.50 served as solid support throughout November. We think it will hold during December, which makes it the perfect strike price for this trade.
Daily Chart of Bank of America (BAC) — Chart Source: TradingView
As with many of our recommendations lately, we think it is best to avoid committing to this trade for too long. If early January options offer a decent premium, those are a perfectly acceptable way to collect income on BAC.
We don’t know what’s coming in the next month, but we’re betting long-term rates are on the rise again.
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.
