Get Paid to Go Long Bank of America

I like Mark Riddix's recent Seeking Alpha article entitled 'Three Financial Stocks Worth Holding'. The three he suggests are Wells Fargo (WFC), JP Morgan (JPM) and Bank of America (BAC). I'm a 10+ year satisfied customer of Bank of America so I will use BAC to build on his idea.

BAC is currently trading around $16 but it has been down below $11 recently. It will probably re-test this low at some point. Here is the idea. Make sure you have at least $1,250 in your brokerage reserve account. Sell a December $12.50 put. You should get around a $50 premium for this. If BAC re-tests the lows before the 3rd Friday in December, your option contract will most likely be exercised and you will find yourself long BAC with 100 shares at $12.50. Not a bad starting point for a BAC position at all.

If BAC doesn't get below $12.50 by then, you keep your $50 premium and use the same strategy next month. Since the thinking goes that because of its fast approaching "too big to fail status" Bank of America will eventually be a great stock to own but it will probably struggle in the short-term, you can use this strategy for the next six months or so, to build your position at good entry points and make some premiums at the same time. What do you think?

Disclosure: No current position in BAC

Comments

[GregT:]

I used this exact strategy. I did it a little while back when BAC was trading at 12.50. I used a strike price of $10 and got a whopping $1.44 for selling the put. So if it goes to $10 or below by December 19th, I've purchased at a very good price. If it goes unexercised, I've made 14% in one month.

At this point, I will be very surprised if the stock goes down to $10. That was a special situation based on the problems that Citi was experiencing. With the gov"mint" bailout of Citi, it would seem unlikely that we'll go that low. But you never know in this crazy market. LOL

2008 Dec 01 08:18 AM

[gordon smith:]

another idea with these bank stocks....they are at historical lows and now underwritten by the feds...what a deal...buy 3-4 LEAP contracts knowing that by 1/10 or 1/11 these stocks will have made a big bounce with an improved economy by that time (that's the real risk with this approach) and you can sell or buy the shares cheap and keep it for their dividends

2008 Dec 01 09:17 AM