March 24, 2018 10:32 am
Bank of America Corp (NYSE:BAC) is at the mercy of the markets right now. BAC stock is down roughly 8% from its March 12 highs, largely due to political uncertainty. But this knee-jerk reaction on Wall Street is a boon for Bank of America stock bulls. And the payoff could come as soon as the middle of next month.
Second-quarter earnings season is just around the corner. Bank of America is scheduled to release its report ahead of the open on April 16. Currently, analysts are expecting BofA earnings to rise 43% from 41 cents per share last year to 59 cents. Revenue is expected to get a 2.6% bump to $23.04 billion year-over-year.
Over the long-term, Bank of America has a couple of things going for it. First, the Federal Reserve is expected to lift interest rates at least three times this year. This week, the Fed bumped rates a quarter of a point to 1.75. It marked the sixth increase since the financial crisis.
Also, the central bank promised a faster pace to rate hikes, declaring that “the economic outlook has strengthened in recent months” and bumping its promised hikes next year to three instead of two. Rising interest rates are good for lenders like Bank of America.
The second thing BofA has going for it is that it should be sheltered from a potential trade war. Quite a few sectors, semiconductors especially, are poised to take a hit as China and the EU retaliate to President Trump’s tariffs.
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All of this adds up to a positive fundamental backdrop for BAC stock, making the recent drop in the shares a potential buying opportunity. Technically speaking, Bank of America stock has broken below its supportive 10- and 50-day moving averages. However, the shares have found a backstop in the $30-$30.50 region. Broad market volatility could hold BofA stock range bound below its 50-day for a period, but the shares should return to form — especially after earnings.
In the options pits, BAC stock options traders remain optimistic on the equity’s prospects. Currently, the April put/call open interest ratio checks in at 0.46, with calls more than doubling puts among those options most affected by Bank of America’s quarterly report.
Overall, April implieds are pricing in a potential post-earnings move of about 6.5% for BAC stock. This places the upper bound at $32.55, while the lower bound lies at $28.55. With BAC still in a firm long-term uptrend, I don’t see $30 falling as support unless BofA has something surprising hidden in its next report.
2 Trades for BAC Stock
Call Spread: With BAC stock set to run higher in the wake of the recent pullback to support, traders might want to consider an April $31.50/$32.50 bull call spread.
At last check, this spread was offered at 29 cents, or $29 per pair of contracts. Breakeven lies at $31.79, while a maximum profit of 71 cents, or $71 per pair of contracts — a potential 140% return — is possible if BAC stock closes at or above $32.50 when April options expire.
Put Sell: Alternately, if you’re looking for a more conservative play on BAC stock, an April $29 put sell has a high probability of finishing out of the money. At last check, this option was bid at 44 cents, or $44 per contract. As usual with a put sell, you keep the premium as long as BAC stock closes above $29 when April options expire.
On the downside, if BAC trades below $29 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $29 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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