DailyPlay – Bank of America Corp (BAC) –  December 20th, 2021

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Market Outlook:

Equities continue to respect their support and resistance zones with the major indices once again being contained to a more neutral close to the week. SPY continued lower after price rejected the $470 level on Thursday with the next support level at $453 being a vital area for price to remain above. QQQ managed to bounce near its $382 support level which is encouraging for the growth stocks as a break below that support level would have opened the door for a significant move lower. Price action in bonds and commodities remains choppy overall heading into this week. Our outlook for equities remain neutral with a bullish bias should the key support levels remain intact. 

BAC Bullish Trade Idea:
Our bullish trade today is Bank of America Corp (BAC). BAC is part of the Financial sector and has good exposure to the rising interest rate environment which will likely be a major theme heading into 2022. Out of the major banks, BAC is expected to outperform on a relative basis against its sector as rates move higher. From a technical perspective, BAC has pulled back significantly to an area of support at $43 which provides an excellent risk/reward long opportunity. The Technical Score remains very strong (9 out of 10).

As this is a call diagonal, the idea of this strategy is to purchase the $45 call which gives longer-term bullish exposure. The shorter-dated short leg is used to reduce the cost basis. Approaching expiration, we will likely buy to close the short leg for and sell another shorter-dated call to once again reduce the cost basis. This trade takes advantage of the fact that the shorter-dated options will experience accelerated time decay relative to the longer-dated call and by effectively “rinsing and repeating” the selling of the short leg, investors are able to reduce the cost basis of the long leg and reduce the breakeven price for the overall trade in the months to come.