Bank of America (NYSE: BAC - option chain) shares are rising today on news that the hedge-fund firm Paulson & Co. bought 168 million shares of the stock, now worth $2.7 billion, during the second quarter, according to a regulatory filing. It was the firm's biggest purchase of the quarter, and investors appear to be reading the disclosure as a strong endorsement of the stock, especially since this firm was one of the few that saw the financial trouble coming. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on BAC.BAC opened this morning at $16.66. So far today the stock has hit a low of $16.23 and a high of $16.77. As of 11:45, BAC is trading at $16.73 up 80 cents (5.0%). The chart for BAC looks neutral and S&P gives BAC a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a November bull-put credit spread below the $11 range. A bull-put credit spread is an options position that combines the purchase and sale of put 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 7.1% return in three and a half months as long as BAC is above $11 at November expiration. BAC would have to fall by more than 34% before we would start to lose money. Learn more about this type of trade here.
BAC has not been below $11 since May and has shown support around $11.90 recently.
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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