For many investors, Bank of America Corp (BAC) shares are effectively in a state of technical incarceration. But for BAC stock options traders, the confined share price spells opportunity to position using a mostly neutral long butterfly position.
The alchemy of overreaching Federal Reserve policy and recent jobs data appears determined to keep BAC stock jailed below the 200-day simple moving average and in bear territory according to technicians.
Not helping matters, an overbought and richly priced broader market that’s flirting with last year’s all-time-highs is a likely headwind for BAC stock in the near-term.
Nevertheless, this strategist doesn’t see BAC stock as an opportune short either.
The fact of the matter is BAC’s cheap relative valuation and a still-looming rate hike later this summer should provide a technical floor for Bank of America before shares eventually move to new highs for 2016.
In the near-term however, the market environment and BAC price chart point to a more neutral situation for BAC stock — and profit opportunity for a long butterfly spread. Let me explain.
BAC Stock Daily Chart
Looking at the daily chart of BAC, I’m reminded that stocks go up, stocks go down — and sometimes stocks simply meander around.
A lower low pattern beneath the bulls’ coveted 200-day simple moving average has the likely attention of some technical-oriented bears. But our belief is any pressure in BAC stock will be mild.
An oversold condition in BAC’s stochastics and anticipated buyers at slightly lower prices as Fibonacci and recent price congestion come into play supports the use of a long butterfly spread to profit from modestly lower, but mostly directionless conditions.
Bank of America Long Butterfly Strategy
Reviewing the BAC options board, the weeklys BAC June 24 $15/$14/$13 call butterfly is attractive as a short-term play for active traders.
Priced for 48 cents, this slightly bearish-biased position stands to profit at expiration if BAC stock is trading between $13.48 and $14.52. Outside the wings or outer strikes, the debit is lost in full at expiration.
I’d personally look to use money management and exit the spread for a lesser loss if our directionless thesis is put to the test, should BAC move through either wing prior to expiration.
Having said that, visually and as seen on the provided daily chart of BAC, the horizontal breakeven lines provide a nice-sized area to extract a profit if BAC stock does cooperate technically.
Better yet, if BAC stock finds itself at $14 or “X” on the price chart at expiration — for this spread trader that’s nicer than a “get out of jail card” with a profit of around 100% in hand.
Investment accounts under Christopher Tyler’s management currently own hedged BAC stock and option positions. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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