Follow Up to Trade Alert - (BAC) October 2, 2014
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.
Further Update to: Trade Alert - (BAC)
Buy the Bank of America (BAC) November, 2014 $15-$16 in-the-money vertical bull call spread at $0.83 or best
Opening Trade
10-2-2014
expiration date: November 21, 2014
Portfolio weighting: 10%
Number of Contracts= 120 contracts
Well, we finally got the melt down I was waiting for to go into the Bank of America (BAC) November, 2014 $15-$16 in-the-money vertical bull call spread. This has been the worst week for stocks in two years.
The really interesting thing is that it has hardly put a dent in the shares of (BAC), or any other financial either. It is a well worn trading nostrum that if you throw bad news on a stock and it fails to go down, you buy the daylights out of it.
Take a look at the chart below, and you?ll see one of the cleanest setups you will ever find. You have the 200 day moving average bang on the 200 day moving average, which will provide support of Gibraltar proportions.
What?s better is that the shares are a day or two away from performing the fabled ?golden cross.? That?s when the 50-day moving average pierces the 200-day moving average to the upside.
This is a hugely positive development. When you witness one of the premier lagging sectors of the market, financials, deliver such an epochal reversal, you jump in with both boots.
If I am right about interest rates remaining flat or rising for the rest of the year, then financials have to be at the absolute top of any ?BUY? list.
Bank of America (BAC) certainly was the chief whipping boy of the financial crisis. Since 2008, it has paid out more than $50 billion in fines and lawsuit settlements for every transgression under the sun.
After getting a bail out from the US Treasury, it was forced to cut its dividend payment to a token one cent. Do any Google search on the company and you are inundated with a flood of bad news.
All that is now ancient history. The entire banking industry is now moving into the sweet spot in the economic cycle. This is because rising interest rates mean that they will be able to charge more for loans, while their cost of funds (deposits and equity) remains low. These rising spreads fall straight to the bottom line.
Now with the bank?s Torturer-in-Chief, US Attorney General Eric Holder, announcing his retirement, the way is clear for better days ahead.
With the 30-year bull market in bonds now at an end, substantially higher rates in the near future are now included in virtually every economic forecast out there. Since the beginning of 2014 the ten-year Treasury yield has collapsed from 3.05% to as low as 2.32% at he end of August, pummeling bank shares.
What happens next? They go from 2.32% back up to 3.05%, possibly by yearend, then a lot more. Bank shares will ride on the back of this bull.
The jungle telegraph is now ringing with the prospect of a dividend hike by the company, currently at a lowly four cents. We may get the good news as soon as the next reporting period on October 14. The implications of such a move are broad.
If it pulls this off, it is only because of renewed confidence by the markets in the improved financial condition of the company. After several capital raises and the liquidation of the wreckage of the 2008 crash, US banks are now the healthiest in history, with balance sheets of bedrock stability.
Ahem, they are also too big to fail, again.
To get the dividend yield on the shares up to industry standard of 2.5%, the company really needs to raise its dividend to 42 cents. It certainly has the cash flow to do this. In 2013, (BAC) reported net income of $11.4 billion, more than four times to amount needed to cover such a payout.
Needless to say, this is all great news for the share price. The prospective return of increasing amounts of capital to shareholders should suck in new and wider classes of shareholders. It won?t be just about hedge fund punters anymore. Respectable, large, and long term holding institutions will be in there as well.
Take a look at the charts below, and it is clear that such a move is underway. (BAC) broke out from the end of a classic triangle formation, which traditionally resolves itself to the upside. New post crash highs beckon.
You can find more dry powder in the chart for the Financials Select Sector SPDR ETF (XLF), which clearly rejected a complete breakdown at long-term trend support in early February.
You can buy this spread anywhere in a $0.80-0.90 range and have a reasonable expectation of making good money on this trade.
For detailed instructions on how to execute a Bull Call Spread, please click here for the video.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don?t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Buy 120 November, 2014 (BAC) $15 calls at?????$1.95
Sell short 120 November, 2014 (BAC) $16 calls at..??.$1.12
Net Cost:??????????????????.....$0.83
Potential Profit at expiration: $1.00 - $0.83 = $0.17
(120 X 100 X $0.17) = $2,040 or 2.04% profit for the notional $100,000 portfolio.
