Bank of America Corporation (NYSE: BAC) stock is falling with other banks this morning after an analyst at Oppenheimer cut earnings estimates for many major banks, predicting bank losses will be the highest in the past 20 years or more due to greater individual defaults on mortgages and other loans. The analyst cut BAC's first-quarter EPS estimate to $0.92 per share from $1.01 per share, and cut BAC's fiscal-2008 estimate to $3.65 per share from $4.10 per share. Also contributing to the finance woes is Goldman Sach (NYSE: GS)'s news it expects further writedowns. 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 $53.15 last February, the stock hit a one-year low of $33.12 in January. BAC opened this morning at $42.27. So far today, the stock has hit a low of $41.77 and a high of $42.50. As of 10:55, BAC is trading at $42.46, down 14 cents (-0.3%). The chart for BAC looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $45 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. This particular trade will make an 8.7% return in just four weeks as long as BAC is below $45 at March expiration. The stock would have to rise by more than 6% before we would start to lose money.
BAC hasn't been above $45 by more than a few cents since December and has shown resistance around $44 recently. This trade could be risky if the US economy turns around, but even if that happens, this position could be protected by resistance BAC might find around $45, where the stock peaked in late January.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in BAC or GS.
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Reader Comments (Page 1 of 1)
2-25-2008 @ 1:47PM
MHL5723 said...
I TOLD ALL THAT THIS WILL HAPPEN, I DO MY BANKING WITH BAC AND THEY RASIE MY RATES ON ALL ACCOUNT THEY COULD, I CALL THEM AND THE PERSON I TALK TO WAS SO MAD AT ME WHEN I SAID I KNEW THIS WHOULD HAPPEN, SHE SAID IF YOU TALK BAD ABOUT THE BANK SHE WILL HANG UP ON ME, SO I HUNG UP ON HERE, AND THEN CLOSED [2] ACCOUNT THEY RASED THE RATE, MY SPELLING IS VERY BAD [SORRY]
GOOD LUCK BAC BAC NOW WHAT ?????