Bank of America (NYSE:BAC) stock was up almost 3% on Monday, which is great. What is not so great is its inability to sustain those gains past the resistance levels. Chasing BofA on green days is likely to result in disappointment fairly quickly. Bank stocks are cheap, so the bulls have bought the dips but refuse to stay long too long. Consequently BAC stock is frustrating to most investors who are eager to see it shine.
Usually a strong base emboldens buyers, but in this case there are outside factors raising invisible shields. The Federal Reserve is committed to keeping rates too low, which makes it hard for banks to grow profits. Today’s featured trade offers a way around this by leveraging the core value.
The S&P 500 and the Nasdaq have completely recovered from the March correction and are setting records even this morning. Conversely, BAC stock is down over 25% year-to-date, and not even halfway back from its quarantine lows. This is not a problem specific to this bank because the so called best-of-the-best, JPMorgan (NYSE:JPM), is down even more.
In spite of its lackluster performance, the stock hasn’t lost its fans. The analysts love it and most of them rate it at least as a buy, yet it still trades $3 below their average price targets.
Clearly they think it should be higher and they are not giving up on it. Let’s open the magic bag of tricks and trade this conundrum.
BAC Stock is Worth the Risk
Bank of America has a 12 trailing price-earnings ratio, and it sells at below its book value. This is undoubtedly cheap — so much so that Wall Street doesn’t even give it credit for all of its assets. This is not typical, especially for a company that has just passed a stringent stress test from the Federal Reserve. BAC stock bulls are still hesitant and the pattern has been to buy it after a hard correction, then fade it part way through the bounces.
BAC stock has traded inside a predictable range, and therein lies the opportunity today. If you don’t believe me compare today’s chart to the the lines I shared in a prior write up from months ago. For the past three months, it has been bouncing off a low $22.40 of and a high of $29 per share. This information is immaterial for the super-patient investors who are in the stock for eons. But for the rest of us, the way to profit from it is to swing trade it long below $25 then exit as it approaches $29 per share. Waiting for the perfect spot will likely not work, so it is best to aim for zones instead.
Conversely if by some miracle Bank of America bulls succeed in breaking through the $28 and $29 resistance lines, they can rally for another $5 from there. This won’t be easy, as there is no obvious catalyst to make that happen. Until then, swing trading is probably the best mid term opportunity.
How to Profit from BAC Stock That Has no Stamina
When the upside from capital appreciation is limited investors should consider using options. I am confident of the value in the stock therefore I can sell risk against it for profit. Instead of buying shares and hoping for a rally, the idea is to sell puts on bad days and collect premium. Then all that is necessary to profit is time, because we know that the banks will hold the support.
For example last week as the price was falling into support, investors who were willing to own shares of BAC could have sold the Oct. 2 $24.5 put and collected over $1 per contract. They would not have needed a rally to win and they break even at $23.4 per share.
Then on an up day like Monday, they can buy calls to capture the upside. The reason this makes sense is because it provides the opportunity to participate with little out-of-pocket expense and leave some room for further downside. Then suddenly it’s not so important to nail the perfect bottoms and tops.
There Are Other Risks, So Use Caution
As millions of U.S. homeowners look to exit the forbearance protection from the CARES act, we could have a little tizzy in the real-estate market and BAC holds a lot of those loans. Approximately 8% of all mortgages in the U.S. are in such a plan and they have the option to extend it beyond its initial 90-day term.
Things are even worse in the commercial real estate market. Retail space demand has been decimated and is not likely to come back to its prior levels. Thousands of businesses will likely walk away from their lease obligations because they could not survive the global shutdown. The ones left are likely going to telecommute a lot more regularly. The good news is that banks have all increased their loan loss reserves in advance. This means that they’ve already taken the pain potential pain on their books.
It Is Also a Matter of Interest
In addition to its stability, BAC also pays a 2.8% dividend. This is important because central banks have gone crazy with their efforts to prop up the global economies. And in the process they killed all sources of fixed income other than equities. This forces investors seeking interest income into accumulating stocks like Bank of America by default.
This is the same There Is No Alternative — or TINA — acronym that works for U.S. Bonds. In this case, investors can rest knowing that the bank is under the watchful eye of the Federal Reserve at all times.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
