Yesterday the S&P 500 began to drag again from its latest highs, and futures costs are pointing decrease this morning. We’re nonetheless cautiously bullish, and we need to promote a put write on a stock with sturdy fundamentals.
The very best time to promote a put write is when a bullish stock is pulling again towards a assist degree, and that’s precisely what Bank of America (NYSE:BAC) is doing.
A Pause on Optimism
Yesterday, the Federal Open Market Committee (FOMC) accomplished its June assembly, and when Federal Reserve Chair Jerome Powell held his press convention, traders weren’t happy with what they heard.
The FOMC received’t increase rates of interest — it doesn’t anticipate to till 2022. Whereas the market does like decrease charges, the dedication from the Fed additionally signifies a unfavorable outlook for the longer term.
The central bank additionally famous that it expects the U.S. financial system to shrink by 6.5% this yr, adopted by a 5% acquire in 2021.
The Federal Reserve’s unemployment forecasts additionally confirmed that the nation received’t totally get well from this disaster for a very long time. It predicted drops in unemployment yearly, with the U.S. reaching 4.1% in 2023. That also wouldn’t put us at pre-pandemic ranges.
Jerome Powell mentioned this restoration trusted the habits of COVID-19, and that’s the place the opposite dangerous information got here in.
California and Texas are each reporting growing hospitalizations attributable to COVID-19 in some locations, renewing fears over the second wave we have been warned about.
BAC has naturally been pulling again barely, however we imagine it can proceed to push increased when the market turns round.
The Runaway Hole
We lately closed a place on BAC for a revenue after the surprisingly bullish unemployment report on Friday. It seems like we weren’t the one ones who took income off the desk.
BAC has been pulling again ever since reaching its post-unemployment report excessive of $29.01 on June 5. This provides us a terrific alternative to promote one other put write towards the stock.
The stock’s bullish bounce on June 5 created a “runaway gap” on the stock’s chart. The underside of this hole at $26.78 is probably going going to function a assist degree for BAC within the quick time period.
Day by day Chart of Bank of America (BAC) — Chart Supply: TradingView
We’d suggest setting your strike price barely beneath the potential assist simply above $26. Giving your self a buffer will assist cut back your threat.
When promoting a put write, needless to say BAC reviews earnings on July 16, earlier than market open. Promoting an possibility that expires after BAC reviews earnings may supply extra premium, however it can even be a lot riskier.
We might suggest sticking to early July expirations.
InvestorPlace advisers John Jagerson and S. Wade Hansen, each Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, in addition to the co-editors of Strategic Dealer.