July 6th, 2022
Powerful ‘Sell’ Signal for BAC
Dear Reader,
Yesterday, we looked at a Daily Price Chart of Humana, Inc., noting that the stock's 24/52 Day MACD is trading above the 18-Day EMA signaling a 'Buy'.
For today's Trade of the Day e-letter we will be looking at a monthly chart for Bank Of America Corp. stock symbol: BAC.
Before breaking down BAC's monthly chart let's first review what products and services the company offers.
Bank of America Corporation, through its subsidiaries, provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. Its Consumer Banking segment offers traditional and money market savings accounts, certificates of deposit and IRAs, noninterest-and interest-bearing checking accounts, and investment accounts and products; and credit and debit cards, residential mortgages, and home equity loans, as well as direct and indirect loans, such as automotive, recreational vehicle, and consumer personal loans.
Now, let's begin to break down the monthly chart for BAC stock.
Below is a 10-Month Simple Moving Average chart for Bank Of America Corp.
Sell BAC Stock
As the chart shows, in March, the BAC 1-Month Price, crossed below the 10-Month simple moving average (SMA).
This crossover indicated the selling pressure for BAC stock exceeded the buying pressure. For this kind of crossover to occur, a stock has to be in a strong bearish downtrend.
Now, as you can see, the 1-Month Price is still below the 10-Month SMA. That means the bearish trend is still in play!
As long as the 1-Month price remains below the 10-Month SMA, the stock is more likely to keep trading at new lows and bearish positions should be initiated.
Our initial price target for BAC is 28.75 per share.
86.1% Profit Potential for BAC Option
Now, since BAC's 1-Month Price is trading below the 10-Month SMA this means the stock's bearish decline will likely continue. Let's use the Hughes Optioneering calculator to look at the potential returns for a BAC put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat BAC price to a 12.5% decrease.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following BAC option example, we used the 1% Rule to select the BAC option strike price but out of fairness to our paid option service subscribers we don't list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select a BAC in-the-money option strike price, BAC stock only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if BAC stock is flat at 31.24 at option expiration, it will only result in a 5.0% loss for the BAC option compared to a 100% loss for an at-the-money or out-of-the-money put option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.
The prices and returns represented below were calculated based on the current stock and option pricing for BAC on 7/5/2022 before commissions.
When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying stock continues to move down in price.
For this specific put option, the calculator analysis below reveals if BAC stock decreases 5.0% at option expiration to 29.68 (circled), the put option would make 40.6% before commission.
If BAC stock decreases 10.0% at option expiration to 28.12 (circled), the put option would make 86.1% before commission and greatly outperform the stock return.
The leverage provided by put options allows you to maximize potential returns on bearish stocks.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.
Chuck's $3,000 Trading Scholarship
I don't want you to miss a single opportunity to reach your goals. That's why I'd like to offer you a scholarship of the full $3,000 Enrollment Fee of my exclusive Weekly Option and Trade Alert Service.
I want you to follow in my footsteps and succeed beyond your wildest dreams, so please call Brad in my office at 1-866-661-5664 or 1-310-647-5664 and get started today!
You can also CLICK HERE to schedule a call now!
Wishing You the Best in Investing Success,
Editor, Trade of the Day
Have any questions? Email us at dailytrade@chuckstod.com
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