Financial stocks, once the belle of the ball, have now been forsaken by the Street. Their momentum has been lost, their uptrends neutralized. Chief among the momentumless is Bank of America Corp (NYSE:BAC). At $23, BAC stock sits at the same level as last December.
That’s six months of churn.
You’ll recall that after the Presidential election, bank stocks were all the rage. The anticipation of higher interest rates and a decisively bank-friendly leader lit the financial sector on fire. The month following Donald Trump’s successful White House bid, Bank of America galloped 37% higher.
That’s an insane amount of rapid gains for a stodgy old bank.
And perhaps that’s part of the reason why BofA has been drifting. If you ate an elephant in one sitting, then you’d probably need some time for digestion as well.
Another cause — perhaps the
primary cause — for the giveback in BAC stock and its peers over the past few months is the behavior of interest rates.
Specifically, the 10-year Treasury yield. Consider the following chart which displays the price of BAC with an overlay of 10-year yields (brown line). The lower panel includes a correlation study illustrating just how related the pair has been.
At 0.91, the correlation between interest rates (as measured by 10-year yields) and Bank of America’s stock price has been darn near perfect. That means they’ve been moving in lock-step. With both securities tied to the hip, it’s no wonder BofA has lost its mojo.
Those rooting for gains and glory to return to the financial sector need rates to stop playing in the mud and start rising once more. Until that happens, expect further dithering from banks.
A BAC Stock Time Spread Awaits
The options market provides a unique way to capitalize on further neutral behavior in BAC. We’ll also structure the position to profit if the stock starts rising again over the coming month.
Buy the Aug $22 call option while selling the 30 Jun $24 call option. This creates a calendar spread that will thrive if the stock is at or above $23 at June expiration. The net debit for the trade is currently $1.42. That represents the max risk.
The best-case scenario is for BAC stock to rest right at $24 on June 30. If it does, then you could capture a max profit near $70 (or, roughly a 50% return). To increase the odds of exiting with gains in tow, I suggest closing the position if you can lock in a profit of $30 to $50 per spread.
At the time of this writing, Tyler Craig held no positions in any of the aforementioned securities.
