Bank of America Short Options Pay Big

The market seemed fairly positive yesterday if you just looked at the headline numbers. However, the number of stocks falling was nearly equal to the number rising, which is a measure of market breadth that indicates some underlying weakness.

We think part of the issue is the focus on the lack of progress on the next round of stimulus.

Democrats in the U.S. House of Representatives are vowing to stay through the break to reach a deal, but one of the negotiators for the White House, Jared Kushner, has indicated that a deal is unlikely until after the election.

We don’t expect this problem to be a permanent issue for the market, but it may contribute to another round of short-term volatility that will keep the major indexes trading within a range this month.

Bank of America (NYSE:BAC) is also dealing with some bearish news that may keep it in a consolidation range, and we want to take advantage by selling a covered call.

Buying Big Debt and Losing to Fintech

The COVID-19 pandemic disrupted many of our systems, including our public transit. The New York Metropolitan Transportation Authority is now in desperate need of money to finance its projects and avoid service cutbacks.

BAC and fellow big bank JPMorgan (NYSE:JPM) won the bids for the MTA’s new debt.

This is probably one of the larger stories for BAC, other than the redemption of its senior notes, and while it isn’t bad, it also isn’t exceptional enough to move the stock.

On the other side of things, the financial technology or “fintech” segment has finally grown larger than the six biggest banks in the U.S. The market cap of payment stocks like Visa (NYSE:V), MasterCard (NYSE:MA), PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) has crossed the $1 trillion mark, while the six largest banks in the U.S. are work less than $900 billion total.

With many fintech companies adding traditional banking services into their product repertoire, they are certainly homing in on the big banks’ business, but this news also shows where investor enthusiasm is right now.

Without big news on the horizon, we don’t expect a lot of movement from BAC.

Waiting for Earnings to Knock Things Loose

We’ve been selling covered calls on BAC stock for several weeks now, as the stock climbed above $25 per share, which was our original purchase price. Overall, we are very pleased with the money we have made, but we also aren’t concerned about holding onto BAC for a big payout from the stock.

In the chart below, you can see that the stock is still following up-trending support higher. We think BAC may stay above the $25 level going forward, but we’re still considering $25 as a strike price for a covered call.

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

Having a lower strike price increases the total premium we earn and gives us more of a hedge in case the stock drops with the market. We would rather have our stock called away at its breakeven price than continue to hold it while earning less income on premium. After all, once BAC is called away from us, we can sell put writes against it if we want.

The premium available to options traders is also higher right now thanks, in part, to the volatility in the market. By selling October options that expire after BAC’s earnings report on Oct. 14, we can capitalize on the current volatility and the uncertainty around earnings. That will let us net even more premium, which is pure profit if the stock is called away at breakeven when the option expires.

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/2020/09/bank-of-america-short-options-pay-big/.

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