A Trade Idea As Another Bank of America Entry Point Presents Itself

On July 30th I mentioned how I thought Bank of America (BAC) stock at $47 was attractive with a 5.4% dividend yield. The shares moved above $52 since that post, but today are falling back sharply, to $48 each, after the company posted poor third quarter results, just like every other bank has thus far. The dividend now stands at 5.3%, and I think it is very safe.

If you want to generate even more income on this trade, you could buy the stock to collect the dividend and any capital appreciation, while simultaneously selling out of the money call options on the shares to collect more cash. For example, the May 2008 52.5 calls are selling for about $1.75 each right now. Buying the stock and selling those calls would result in a breakeven point of ~$45 per share over the next 7 months or so. Conversely, your upside would be up to $52.50 on BAC stock, plus dividends and option premiums of around $3 per share (up to 15% in total gains).

If you think the stock will trade within the recent range of the high 40’s to low 50’s, this trade would be a great way to make a double digit percentage profit if BAC can make up the few points of recent losses in coming months.

Full Disclosure: Long Bank of America at the time of writing

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6 Thoughts on “A Trade Idea As Another Bank of America Entry Point Presents Itself

  1. bungaloo on October 18, 2007 at 8:17 AM said:

    Any thoughts on Citi for the same type of trade? Yield is a little lower but have to think there is more upside than downside in that stock right now.

  2. Chad Brand on October 18, 2007 at 8:23 AM said:

    Sure, there are several big diversified banks with yields in the 4-5 percent range that it would work with.

  3. Anonymous on October 18, 2007 at 12:33 PM said:

    BofA may be down, but they are not out. The share is a steal now if ask you me. I’m pretty sure the shares are going to go up, the management is just too experienced to let them fall below mid-40s (I hope.)

  4. Anonymous on October 18, 2007 at 9:52 PM said:

    If you write the call on the stock will you still get the dividend?

  5. Anonymous on October 19, 2007 at 2:07 AM said:

    BofA may be down , but they will be actually fall even lower and management is experienced but they will not be able to do anything about it…. it is called supply and demand .
    Yes you will still receive the dividend unless option is excercised before pay date and /or strike price is adjusted if you have chosen an expiration month falling into dividend payment period.

  6. buckeye1 on October 24, 2007 at 6:57 AM said:

    My contacts inside B of A indicate considerable turmoil, especially inside the investment bank, which has been ~1/3 of earnings for the past few years. I think the dividend is safe and there is probably not a ton of downside unless interest rates go up, but I also think the stock is at best dead money considering all the problems at B of A right now. It is hard to see things improving anytime soon. Probably better opportunities out there.

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