Bank of America (NYSE: BAC) stock is down big in this morning's trading, as loan write-downs drove the company's profit down 32% in the third quarter, despite solid revenue growth in most of the company's businesses. BAC earned 82 cents per share, missing analyst estimates of $1.06 per share by a mile and sending the stock tumbling.Immediately following earnings is sometimes a good time to place a hedged trade, since you now have some idea of which way the stock could be moving in the near future. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on BAC.
After hitting a one-year high of $55.08 in November, the stock slipped to a 52-week low of $46.52 in August. This morning, BAC opened at $48.44. So far today, the stock has hit a low of $47.76 and a high of $50.03. As of 10:55, BAC is trading at 48.45, down 1.58 (-3.2%). The chart for BAC looks bullish and steady, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $55 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in 3 months as long as BAC is below $55 at January expiration. B of A would have to rise by more than 33% before we would start to lose money. Learn more about this type of trade here.
BAC has not been above $55 by more than a few cents in the past year and has shown some resistance around $53 recently. This trade could be risky if the Fed action in two weeks gives the financial sector a boost, but even if that happens, this position could be protected by the resistance the stock formed when it topped between $52 and $53 over the past three months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in BAC.
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Reader Comments (Page 1 of 1)
10-18-2007 @ 1:37PM
Frank Lancaster said...
Here is an idea, stop being the Bank of Mexico and start being the Bank of America again and alot of us that have left you will come back. Well, I won't I am happy with US bank, which by the way stands for United States, I don't know why the CEO's of BofA think that the A stands for MEXICO, but hey, you are getting what you deserve. LOL
10-18-2007 @ 2:26PM
King Kang said...
While BofA doesn't seem to quite be in the same league as the investment big boys (although it proved it can lose like them), give BofA time. My bet is that within a decade BofA and Wachovia will be serious challengers to the "old boy" network of traditional investment banks. BofA has more experience than we realize http://www.newsvisual.com/newsvisual/2007/03/bank_of_america.html , just give them time. Oh, and to Frank Lancaster (the first commenter), BofA originally started as the Bank of Italy, but changed its name after the 1906 San Francisco earthquake because people and the city didn't want to borrow from "Italy" to rebuild the city. Just thought you would like to know.....
10-18-2007 @ 4:49PM
steveinDenver said...
Down Big???? Down Big??!!!. The damn stock dropped just over $1!!! That's down big!!!??? What kind of alarmist jackass wrote this?! We have waaaaaaaay to many "experts" reporting financial news who seem to still be wet behind the ears, need their diaper changed, and someone to teach them some historical perspective, and whoever wrote this absolutley has to be in that class. Down big!!! Pure juvenile jackass blather!!
10-18-2007 @ 5:08PM
steveinDenver said...
Edited for political correctness. a price drop of just over $1 ascribed to a 32% earnings drop is not "Down big!!"
10-18-2007 @ 9:11PM
a said...
for everyone who thinks that BOFA just allows anyone to get an account or credit card with the bank this is the way the story goes (the media wont tell you this) i work for the bank so i do know the true story. in order to have an accout or credit card a person must have a SS# card. all the customers had the card. also they only had secured credit cards which mean it was their OWN money, not yours, on the card. now if the immigrants had fake SS# cards that a different story (some fake ones can look very orginial) and if they were real then that would be the governments fault.