Yesterday the S&P 500 started to pull back from its recent highs, and futures prices are pointing lower this morning. We’re still cautiously bullish, and we want to sell a put write on a stock with strong fundamentals.
The best time to sell a put write is when a bullish stock is pulling back toward a support level, and that is exactly what Bank of America (NYSE:BAC) is doing.
A Pause on Optimism
Yesterday, the Federal Open Market Committee (FOMC) completed its June meeting, and when Federal Reserve Chair Jerome Powell held his press conference, investors weren’t pleased with what they heard.
The FOMC won’t raise interest rates — it doesn’t expect to until 2022. While the market does like lower rates, the commitment from the Fed also indicates a negative outlook for the future.
The central bank also noted that it expects the U.S. economy to shrink by 6.5% this year, followed by a 5% gain in 2021.
The Federal Reserve’s unemployment forecasts also showed that the country won’t fully recover from this crisis for a long time. It predicted drops in unemployment every year, with the U.S. reaching 4.1% in 2023. That still wouldn’t put us at pre-pandemic levels.
Jerome Powell said this recovery depended on the behavior of COVID-19, and that’s where the other bad news came in.
California and Texas are both reporting increasing hospitalizations due to COVID-19 in some places, renewing fears over the second wave we were warned about.
BAC has naturally been pulling back slightly, but we believe it will continue to push higher when the market turns around.
The Runaway Gap
We recently closed a position on BAC for a profit after the surprisingly bullish unemployment report on Friday. It looks like we weren’t the only ones who took profits off the table.
BAC has been pulling back ever since reaching its post-unemployment report high of $29.01 on June 5. This gives us a great opportunity to sell another put write against the stock.
The stock’s bullish jump on June 5 created a “runaway gap” on the stock’s chart. The bottom of this gap at $26.78 is likely going to serve as a support level for BAC in the short term.
Daily Chart of Bank of America (BAC) — Chart Source: TradingView
We’d recommend setting your strike price slightly below the potential support just above $26. Giving yourself a buffer will help reduce your risk.
When selling a put write, keep in mind that BAC reports earnings on July 16, before market open. Selling an option that expires after BAC reports earnings may offer more premium, but it will also be much riskier.
We would recommend sticking to early July expirations.
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.
