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Sunday, April 19, 2009

Bank of America: Can the Monster Bank Follow the Trend of the Other Financial Giants?


In the past 2 weeks we've heard from Wells Fargo (WFC), JP Morgan Chase (JPM), Goldman Sachs (GS), and Citigroup (C). This week we'll hear from Bank of America (BAC) and Morgan Stanley (MS). I feel BAC should easily beat estimates, like the other giants under the new relaxed accounting rules. BAC's forecast will certainly be the key that drives the market tomorrow, because this market it getting tired. I have been studying the chart for Bank of America today (as seen below) and I think if we can get BAC above 12 a share we'll have a good shot of going higher in the weeks to come (click on the chart to get a larger more clear image).


I think if we get through 12 it is important to test the 12 level, forming a clear double bottom with BAC price from the previous market bottom on November 21, 2008. The critical support level is the 8.50 range and we may test it but it is very important to stay above it. If we can get through 12 a share, it looks like we could get to 14.50 range without any major resistance, and then 15.50 range. Looking ahead it looks like we'll need to break above 18.50 and retest that level to move higher in the future. A clear double bottom was formed from lows in July and October, but we broke below it. However as I've said before, we can go up just as fast as we went down, and we could be back at 18 range before we know it. We'll see how the stock reacts tomorrow on their earnings report and forecast to see where we might be headed in the weeks to come. I think overall tomorrow should be another very volatile day, so buckle up.


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2 comments:

Acegikmo1 said...

Hi,

I'm a 23-year-old student also interested in options. I've been reading your blog for several months. I think it's a well-written, valuable resource and quite insightful. I'm surprised there aren't more comments.

Regarding BAC, I had purchased 1200 shares over the last few months (my last buy was on March 5 for $3.24). The recent rally led me to sell $10 call options on all my shares, which expired yesterday. I feel this was good timing.

If you don't mind fielding a question: I'm long on BAC for the long-term. I'm thinking of either buying calls or selling puts. But I'm not sure what timeframe is best. The Jan '10 $10 calls look relatively cheap, but so do the June '09 ones... I'm thinking that options expiring after the predicted late '09 economic recovery might be best, but today's sell-off has got me wondering also about the near-term. Do you have any advice here? Do you think buying calls or selling puts is the better strategy? Also, what strike price seems best (nearer to the money seems risker, but potentially more rewarding)? Is it best to act soon or wait a bit? Also, do you generally re-buy/re-sell options when they become too profitable or let them expire? Sorry for all the questions; I'm quite curious.

Thanks a ton,

Jonathan

Option Maestro said...

Jon, thanks for the kind comments on my blog. If you want to get long BAC I would buy the common shares and write out of the money calls for a nice premium. Depending on where you think the market is going will determine where and when you buy/sell the options. If I were looking to pick up some common stock, and I think BAC may not go too much lower, I'd sell in the money PUT contracts for the 12-15 May-July range. This would allow me to take a nice upfront premium and I'd hope it would rally but not past the strike (if I want the common stock). I judge which options based on the daily delta which gives me an idea of which I want. If I make money on covered calls, and uncovered puts, I buy them back and wait to sell them out again for a better premium. Depending on your risk tolerance has a lot to do with trading options so I wouldn't even dare give advice. Let me know what you do.

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