Bank Of America: Trading Around The Edges

| About: Bank of (BAC)

As many of my readers know, I suggested a buying opportunity with Bank of America (NYSE:BAC) on 12/21/2011 (read this) when the shares were selling for $5.17/share.

I followed that opinion up with a longer term view of BAC share price potential in a follow up article (read this) just last week.

Today, 2/8/2012, the share price has surged once again and as of this writing, stands at $8.12/share.

Bank of America Corporation (<a href='' title='Bank of America Corporation'>BAC</a>)

One of the few investment strategies I have not discussed is trading. While I do not day trade any longer, I do take a shot at a risk play every now and then with money that i can afford to lose.

The one huge thing I learned while day trading was that you must sell in order to make a profit. I know it sounds ridiculous but I am not kidding when I say most investors do not know when to sell. It is only natural I guess to want a winning horse to keep running, but if you push that horse too far too fast, it could break a leg, or even drop dead.

I am not suggesting that BAC will "break a leg" or "drop dead" at all, so please do not throw tomatoes at me yet. I am suggesting that a profit taken now and waiting for another entry point is a prudent strategy.

Folks we have made about 60% in less than two months. Bulls make money, bears make money, pigs will get slaughtered.

Since I have not gone into my personal risk trade strategy now would be a good time to simply say that when I reach a 50% gain in such a short period of time, I am doing one of several things.

Moves To Possibly Make Now

  1. Sell the position completely and wait for the inevitable pullback. Nothing will go straight up forever and if it does and we sold too soon, well, we just find another bargain to trade around the edges with.
  2. Sell just OTM calls (short time frame) for an extra pop of profit and if it goes up a tad more, we have squeezed out a bit more, not paid a transaction fee if the stock is called, and also gives us a little downside protection in the premium received. If the pullback happens too swiftly we can lose more than what we gained in call premiums.
  3. Buy ITM puts to protect our gains now, and if the stock drops we can profit with the increased value of the puts. I'm hesitant to do this myself most of the time, but it is another option. But if the stock surges a bit more, we lose some profits.
  4. Hold the shares and do nothing. This is a strategy in and of itself, but it is geared for the long term, and for this discussion we are talking about a risk reward trade.

My Opinion

I have mentioned last week that I believe the markets are due for a correction (read this). It seems like everyday I look up and find we are still in the green all over the place, and it just reinforces my opinion of an eventual pullback.

Core positions can be held, not added to, but trades might be ripe for profit taking.

BAC is low hanging fruit and the time is "ripe" for me to take profits. How about you?

Disclaimer: Please do your own research and do not buy or sell any security based on opinions expressed here. Your personal investment needs and goals, as well as risk tolerance should always be evaluated beforehand.

Disclosure: I am long BAC.

Additional disclosure: I will be selling my position as soon as I finish this article.