I am talking about financial services giant Bank of America (NYSE:BAC). If we look at the daily chart, you see that I have drawn lines at $15 and $18. These levels have kept the stock in a range for the last year and a half, and they present trading opportunities on the bullish and bearish side.
Simply buy the stock when it is down under $15.25 and the sell it when it approaches $18. You can also sell it short when it approaches $18 and then cover when it gets down near $15. A move from $15 to $18 presents a 20% gain while a short from $18 down to $15 presents a 16.7% on the short sale.
If we take a step back and look at the weekly chart, we see just how long and how strong the range has been. With the exception of a four to five week span in the second quarter of 2014, Bank of America has been locked between $15 and $18 essentially since November 2013.
While the short-term trading of Bank of America presents decent risk/reward possibilities, another way to play the stock is by writing options. When I say write the options, I am talking about selling puts at the $15 strike and selling calls at the $18 level.
At this time, with the stock being down near the bottom of the range, the February 15 strike puts that expire on Feb. 19 have a bid of $0.92. This means you would get $92 for each option you write, because each option represents 100 shares. If the stock isn’t below $15 on Feb. 19, the option is worthless at expiration and you get to keep all of the $92.
If the stock is below $15, the shares could be put to you, meaning that you will now have to purchase 100 shares of Bank of America stock for each put contract that you wrote. Your purchase price will be $15 – as dictated by the strike price of the option you wrote – but you also have the $92 that you collected from writing the put. This means that your cost basis is $14.08 rather than $15 if the stock is put to you.
With the range that Bank of America has been in, do you really mind owning the stock at a cost basis of $14.08? The stock hasn’t been under $14 since November 2013 and it pays a 1.3% dividend.
While writing puts might not be an exciting strategy, it can be a source of income for your portfolio. It can also be a way for you to set a specific price where you want to own a given stock.
The range Bank of America has been in makes for a perfect put-writing strategy.
This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.