Only individuals who are bullish on Bank of America Corporation (BAC) should consider employing this strategy. If you are not bullish on this stock, then it would be in your interest to look for alternative plays.
Investors should have a decent level of understanding in terms of how options work. If you do not have a good understand of how options work or cannot follow this strategy, etc., it would be best to take time to educate yourselves, as jumping into something you do not comprehend is asking for trouble. If you are looking for other ideas you might find this article to be of interest Energy Transfer Partners: A Great Long-Term Candidate?
Bullish strategy for Bank of America Corporation (BAC):
The strategy has two parts to it. In the first part we sell a put. In the second part we use the proceeds from the sale of the put to purchase calls.
It has started to put in higher lows since the end of this May. This is usually a bullish formation and could lead to a sharp move above the $8.00 range. The 8.00-8.10 ranges offer a pretty strong zone of resistance, so a nice break out on strong to decent volume would be a very bullish development. Even more bullish would be a weekly close above 8.22. If this comes to pass it should push the stock to the 9.50-10.00 ranges.
The Dec 2012, 7 puts are trading in the $0.42-$0.43 ranges. There is a good chance that the stock could pull back to the 7.40-7.50 ranges before trending higher. If this comes to pass the puts should trade in the 0.50-0.60 ranges. However for this example we will assume that the puts can only be sold for $0.45 or better. For each contract sold, $45 will be deposited into your account.
The Oct 2012, 9 calls are trading in the $0.08-$0.09 ranges. If the stock pulls back to the suggested ranges the calls could trade in the 0.05-0.07 ranges. For this example, we will assume that we can purchase these calls for $0.08 or better. For each put sold you will be able to purchase up 5 calls and have a net credit of $5. Note if you are bullish on the stock and do not want to wait, you could put this strategy to play right now. If you work the option you might be able still be able to purchase as many as 5 calls for each put sold. You could definitely very easily purchase 4 calls and have some money left over immediately for each put sold.
Risks associated with this strategy
If the shares trade below the strike price, you sold the puts at, the shares could be assigned to your account, therefore, you need to be bullish on this stock before you put this strategy to use. Depending on the number of calls you purchased your final price will range from $6.63 (if you purchased one call only) to $6.95 if you purchased five calls. If your outlook is not bullish, then you should not get into this play.
You have the opportunity to leverage your position for free. The only cost incurred is to put up the money needed to sell the puts. The call portion is free as you are using the proceeds from the sale of the puts to purchase the calls. If the stock takes off, your calls could experience significant gains. Secondly, if the shares are assigned to your account, you will get in at much lower price as opposed to purchasing them right now.
The charts are indicating that the markets could top towards the end of the summer. Moreover, the volume has been rather low and most companies are not too optimistic about the future. In light of this consider closing these positions towards the end of the summer or when and if the call options are showing gains in the 70-100% ranges. To close the position out, you would sell the calls and purchase the puts back.
It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Options tables sourced from yahoofinance.com. Option profit loss chart sourced from poweropt.com