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Bank of America Corp’s (BAC) Irrational Exuberance Will End

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It seems like everything went right for Bank of America Corp (NYSE: BAC ) in the final two months of 2016. Donald Trump won the U.S. election, bringing promises of decreased regulatory control for the financial sector, and the Federal Reserve lifted long-stagnate interest rates while promising three additional hikes 2017. All of that bodes well for BofA's bottom line.

But have the shares come too far too fast? The devil, as they say, is in the details.

Unfortunately for BAC stock, there are very few details to go on. Despite bluster about decreased regulations, Trump has offered little in the way of actual plans for moving forward on allowing the financial sector more leeway.

What's more, despite announcing the potential for three rate hikes in 2017, the Fed did not lift its economic growth forecast, setting many analysts on edge. In fact, Fed Chairwoman Janet Yellen noted that a "cloud of uncertainty" hung over the U.S. economy and would keep the central bank in wait-and-see mode for the time being.

Anyone else remember the Fed promising four rate hikes in 2016?

Click to Enlarge Taking all this in, BAC stock's 35% rally from November through December brings to mind a popular phrase from former Fed Chair Alan Greenspan: "irrational exuberance."

In fact, BAC stock has gained just 0.24% since the beginning of the year, with the shares locked in a tight trading range between $22 and $23.50. And that range is narrowing fast as traders deal overbought conditions and the urge to take profits following 2016's year-end rally amid an increasingly uncertain geopolitical climate.

As for sentiment, analysts appear content to stick with their bullish stance for now. According to Zacks data, 14 of the 20 analysts following BAC stock rate the shares a "buy" or better, with no "sell" ratings to be found. The consensus price target, meanwhile, rests at $24.79, indicating a premium of about 9.4% to Friday's close.

Instead of reining in their ratings on Bank of America, analysts decided to lift price targets over the past month to be more inline with their bullish outlooks. However, with BofA stagnating throughout January, it may be only a matter of time before this sentiment picture tops out and reverses course.

As for BAC options traders, this speculative bunch is also leaning heavily bullish on the shares. For instance, the February put/call open interest ratio currently rests at 0.64, down sharply from even its pre-earnings perch near 0.88. That said, there remains a lack of heavy out-of-the-money call accumulations in the Feb. series, hinting that despite the bullish appearance, BAC options traders may be preparing for a reversal.

Overall, February implieds are pricing in a move of about 3.2% heading into expiration. As a result, the upper bound for the expected move lies at $23.23, while the lower bound rests at $21.77.

2 Trades for BAC Stock

Put Spread: Traders looking for BAC stock to finally give in to uncertainty and profit taking might want to consider the Feb $21/$22 bear put spread.

At last check, this spread was offered at 20 cents, or $20 per pair of contracts. Breakeven lies at $21.80, while a maximum profit of 80 cents, or $80 per pair of contracts, is possible if Bank of America shares close at or below $21 when February options expire.

Put Sell: If betting directly against BofA feels a bit premature to your risk profile, then a more neutral-to-bearish stance may be more appealing. Along those lines, a Feb $20 put sell should do well in taking advantage of BAC's recent stagnation.

At last check, this put was bid at 5 cents, or $5 per contract. The upside, as usual, is that you keep the premium as long as BAC stock closes above $20 when these options expire. The downside is that should Bank of America trade below $20 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $20 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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The post Bank of America Corp's (BAC) Irrational Exuberance Will End appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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