Market Summary
Big banking stocks rallied hard last week with Bank of America (BAC) leading the way by soaring 9% for it best performance since September. Stocks around the globe and the euro were mostly lower on Monday, with investors cautious over whether Greece will receive emergency aid to keep it financially afloat and no signs of progress by U.S. lawmakers to avoid the U.S. "fiscal cliff." Without agreement by Congress and the White House, sharp tax increases and government spending cuts will take effect in 2013, raising the specter of stifling the fragile U.S. recovery and pushing Wall Street indexes to follow the global trend lower. BofA shares fell today in light of the onslaught of lawsuits related to the risky mortgage securities. This has resulted in huge litigation costs for the company, which will have a profound impact on its financials.
Investor Analysis
As mentioned above, Bank of America (BAC) shares benefited from the big stock market move during thanksgiving week. Note in the chart above that over the past month of so, when shares reach the current price traders usually start selling to drive the stock price back down. The largest equity options trade today was in Bank of America (BAC). Shares dropped 7 cents to $9.84 and were among 22 Dow Jones Industrial Index stocks to finish with losses.
Possible Strategy
Investors who want to take advantage of the downside price
move could consider a
simple strategy to profit from the Bank of America's possible move lower. For
example, buying a BofA regular December expiration put option (NYSE: BAC).
Purchasing a December $10 strike price BAC put contract (each contract is 100
shares of stock) would cost $.41 per share based on yesterday's close ($.41 X's
100 shares = $41 per contract), but would generate gains the further stock
price dropped below $10 prior to December 21st. For example, 10 BAC
put contracts would cost an investor approx. $410 ($.41 X's 100 shares X's 10
put contracts). If before the expiration date the stock price drops back down
to $9 as it has done recently, investors would double their money by cashing in
($10 strike price less $9 = $1.00 per share difference [$1 per share X's 100
shares X's 10 contracts = $1,000] minus the $410 cost = approx $590 profit.
For an explanation on the basics
of option trading and description of how trade is set up go to http://www.theoptionplayer.com/strategies/
By Gregory Clay
