Earnings season has begun, and the big banks are hitting us with their numbers. After what we’ve seen, we want to recommend a bullish put write on Bank of America Corporation (NYSE:BAC).
We’ve been curious to see how the big banks were going to perform this earnings season because of the big run-up those stocks have enjoyed during the past quarter.
Sometimes when a stock has a big pre-earnings run-up, traders are more likely to take profits off of the table after the announcement. It’s the whole “buy the rumor, sell the news” idea that drives so much trading on Wall Street.
Based on the different reports this week, financial stocks seem to be in good shape.
How Have the Banks Done?
JPMorgan Chase & Co. (NYSE:JPM) reported earnings on Tuesday, and it had its best fourth quarter profits in 20 years. The biggest factor was a huge increase in fixed-income (bonds) trading. We expect this news to be a huge positive for the market over the next few weeks.
Tuesday’s report from Citigroup (NYSE:C) was similarly good, with growth in fixed-income trading revenue and demand for consumer debt. The strength of the U.S. consumer was the market theme of 2019 and will probably continue to be the primary driver of growth this year as well.
Some readers may have seen that Wells Fargo & Company (NYSE:WFC) was not as fortunate as its peers. Its shares dropped after it reported lower-than-expected profits. But many of its problems came from its legal costs from the litigation related to WFC’s many scandals. Its performance isn’t indicative of any larger issues in the sector.
BAC’s earnings were very strong. The company reported earnings before the opening bell yesterday, and it beat revenue expectations by $50 million and earnings expectations by $0.06 per share — coming in at $22.35 billion and $0.74 per share, respectively.
One common theme across most of these reports was a decline in net interest income because of low interest rates. BAC overcame this decline with strong growth in loans and money on deposit.
Where Did BAC go After Reporting?
BAC saw a little profit taking at the opening bell yesterday, with the stock falling to open at $34.77. The stock seems to be holding steady above the support level just below $34.40, which it established last week on Jan. 6.
Seeing this support level hold tells us the stock is likely going to continue consolidating within the same trading range it has been in for the past month. The pullback provides traders with a great opportunity to sell puts.
Daily Chart of Bank of America Corporation (BAC) — Chart Source: TradingView
Because the profit taking pushed BAC lower yesterday, there is a chance that it could drop below support before heading higher. We recommend picking a strike price at around $33.50 for a put write because it gives traders a little wiggle room to the downside while still providing a healthy premium.
If the stock does experience a little more profit taking during the coming weeks, $33.50 is a former resistance level that could act as support going forward.
As always, we recommend picking an expiration that maximizes the premium you receive without obligating you in the trade for too long. Early to mid-February expirations are probably best.
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.
