Betting on Bank of America’s Safety Net

The Fed can protect the big banks

If we were to boil down everything we have experienced during the past few months of the COVID-19 outbreak into a single word, it would be this: uncertainty.

Nobody is certain of anything these days. How many people have been infected with coronavirus? How many people are likely to become infected? When are we going to get enough tests? How reliable are the tests going to be? How long should we shelter in place? When is a good time to reopen the economy? When will we have a vaccine? Will we ever find a vaccine?

You get the idea.

However, among all this uncertainty, one thing is certain. The Federal Reserve is stepping up with trillions of dollars to try to stimulate the economy and protect the financial system.

Who stands to benefit the most from everything the Fed is doing? Banks like Bank of America (NYSE:BAC).

Banks are the ones whose business model is primarily being backstopped by the Fed, the lender of last resort. The Fed wants to make sure the financial system will continue to function as it normally would through this economic recession, so it has cut interest rates to near zero, started buying Treasurys, mortgage-backed securities and corporate bonds by the billions and stabilized money-market funds.

Traders can take advantage of the moves the Fed has made by selling puts on the big money-center banks, and BAC is our bank of choice.

Making Higher Lows Above $17.95

BAC has been consolidating above its 52-week low of $17.95 for the past six weeks. It hit resistance at $25 at the beginning and end of April, but between those two recent highs it appears to have found support at $21. We expect this support level to hold, but traders looking for a little extra security could look at $20 as a potential strike price.

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

As we mentioned above, uncertainty is all around us right now. The ADP employment report came out today and showed over 20 million jobs have been lost. Though the market looks set to open higher, we don’t know what will happen next.

As a precaution, try not to obligate yourself in this trade for too long. Look at options that expire in late May.

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/2020/05/betting-on-bank-of-americas-safety-net-bac/.

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