BAC Stock: 2 Bear Call Spread Trade Ideas For This Wednesday

Bank of America (BAC) stock is one of the most popular for option traders, with over 137,000 contracts traded yesterday. BAC stock is currently on a Strong Sell signal with an 80% Sell rating and an average short term outlook. Long term indicators fully support a continuation of the trend.

Bank of America Corp. is one of the largest financial holding companies in the U.S. It has 5 business units: Consumer Banking, comprising Deposits & Consumer Lending businesses, provides credit, banking and investment products and services. Global Wealth & Investment Management, comprising Merrill Lynch Global Wealth Management and U.S. Trust, Bank of America Private Wealth Management, offers wealth structuring, trust and banking needs and specialty asset management services. Global Banking, including Global Corporate Banking, Global Commercial Banking, Business Banking and Global Investment Banking, provides lending-related products and services, integrated working capital management and treasury solutions, and underwriting and advisory services. Global Markets offers sales & trading, market-making, financing, securities clearing, settlement and custody, and risk-management services. All Other comprises ALM activities, equity investments, the international consumer card business, liquidating businesses, etc.

Buy and hold investors who recently bought the stock would be down significantly with the stock down 34% in the last six months.

As options traders, we can still make money stocks like BAC drop using the options market. We can find smart ways to trade Bank of America stock with an attractive risk to reward ratio.

Implied volatility is reasonably high at around 31%. The twelve-month low for implied volatility is 21.71% and the twelve-month high is 48.25%. The IV Percentile is 58%.

That means it could be a great time to be a seller of options on BAC. That coupled with the potential bearish action makes it a great candidate for a bear call spread.

Today, we’re going to look at a couple of bear call spread trades with different expiration dates.

Here are the parameters for finding some bear call spread trade ideas on BAC.

Here are the results of that particular screener:

Let’s analyze some of these ideas.

Bear Call Spread 1: September 340 – 35 Bear call Spread

As a reminder, A bear call spread is a defined risk option strategy that profits if the stock closes above the short strike at expiry.

To execute a bear call spread an investor would sell an out-of-the-money put and then but a further out-of-the-money put.

Let’s use the first line item as an example. This bear call spread trade involves selling the September expiry 34 strike call and buying the 35 strike call.

Selling this spread results in a credit of around $0.32 or $32 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:

1 – 0.32 x 100 = $68

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 47.06%.

The probability of the trade being successful is 64.1%, although this is just an estimate.

The spread will achieve the maximum profit if BAC closes below 34 on September 16, in which case the entire spread would expire worthless allowing the premium seller to keep the $32 option premium.

The maximum loss will occur if BAC closes above 35 on September 16, which would see the premium seller lose $68 on the trade. 

The breakeven point for the Bear Call Spread is 34.32 which is calculated as 34 plus the $0.32 option premium per contract.

Bear call Spread 2: August 33.50 – 36 Bear call Spread

Let’s look at the last line item as well which has the lower Max Profit, but a higher probability.

This bear call spread trade involves selling August 19, 33.50 strike call and buying the 36 strike call.

Selling this spread results in a credit of around $0.56 or $56 per contract. That is also the maximum possible gain on the trade. The maximum potential loss can be calculated by taking the spread width, less the premium received and multiplying by 100. That give us:

2.50 – 0.56 x 100 = $194.

If we take the maximum gain divided by the maximum loss, we see the trade has a return potential of 28.87%. And the return can potentially be achieved in much less time.

The probability of the trade being successful is 67.9%.

The spread will achieve the maximum profit if BAC closes below 33.50 on August 19, in which case the entire spread would expire worthless allowing the premium seller to keep the $56 option premium.

The maximum loss will occur if BAC closes above 36 on August 19, which would see the premium seller lose 194 on the trade. 

The breakeven point for the Bear call Spread is 34.06 which is calculated as 33.50 plus the $0.56 option premium per contract.

Mitigating Risk

With any option trade, it’s important to have a plan in place on how you will manage the trade if it moves against you.

For a bear call spread, setting a stop loss of equal to the premium received is a good idea. In the first BAC example above, that would be a loss of around $32. For the second example, the stop loss would be around $56.

Bank of America is due to report earnings on July 20, so there should no earnings risk with these trades unless BAC reports early than planned.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Steven Baster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, August 2, 2022.

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