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Dykstra: Bank on Battered BofA

Lenny Dykstra

The markets followed Tuesday's heavy negativity with an all-out roller-coaster ride. To this point, I have shied away from the financial sector. However, I believe now is the time to take a look at deep-in-the-money calls in Bank of America(BAC - Cramer's Take - Stockpickr). Out of all the financials, this behemoth of a bank gives investors the greatest value, in addition to the greatest upside now.

Bank of America, along with Citigroup(C - Cramer's Take - Stockpickr) and other financials, have experienced a heavy selloff in the wake of large subprime losses. Both stocks have been in a free-fall since early October, and one outcome of the losses has been that Bank of America is now our nation's largest bank by market capitalization.

Although the majority of the news remains negative, the country will not let these large banks fail. They play such an important role in the stability of our economy that the Federal Reserve Bank will take all steps necessary to ensure these companies stay stable.

Although I believe Citigroup to be a scary position, Bank of America draws my attention because the company has aggressively targeted and conquered many markets throughout the country over the last few years. Plus, BofA has been cutting jobs of late, which should help bolster its profit margin.

Additionally, the losses in the subprime market will not last forever. Companies like Bank of America will learn from these experiences and return to what they do best -- make money. Today, I will place a limit order for 10 January 30 calls (VBAAF) for $12.90 or better. Use limit orders and let it come in.

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The next buy level column lists the underlying common stock prices my open positions need to drop to before I add more DITM calls. When the price of the stock falls, it is important to add more DITM calls contracts at the lower price.

This will lower my average cost per contract significantly. With a lower cost basis, I have the opportunity to double up on a win and exit the trade faster, because the option price doesn't have as far to go to score a win. Lenny: I bailed out on Citi for a loss. My question: Have you ever had to bail on a stock option using your system? I don't see any uptick soon in Citi. Is there no limit to how far down you will ride a pick?

Yes, I have had to bail on a DITM call, but this doesn't happen very often. The reason is that most disastrous news only affects the stock price for a short period of time. Obviously, there will be news that causes hardship for a company long term, but I have found that this scenario is the exception, not the rule.

In the case of Citigroup, it may seem that the company will not recover from its setbacks. However, this option has a March expiration, so we have plenty of time to average down and wait it out. The position has been in play less than month and there are four months remaining.

Much can happen in a week; four months for an option is a long time. In the meantime, with the stock and option prices so low, I see this as a buying opportunity, not a reason to bail.

Hi Lenny: When you put out a price to buy an option (and no more than that price) and the GTC is say, $1 more than the original buy price, and then you purchase more options at a lower price (so your average cost is lower), does that original sell price change if you haven't been able to buy additional options, or do you need to lower your GTC price?

When I follow your Stat Book, some of the GTC prices are lowered and at or below what I originally paid for the options. Thank you so much, I appreciate your time and expertise!

When I add to my position, resulting in a lower average price, I will automatically lower my GTC limit sale order to be a point higher than my average. If you are not able to add to a position when I do, you should leave your GTC selling price alone to lock in your profit based on your average cost. However, this will cost you in time, and it is not a winning formula.

I cannot recommend following my strategy if you unable go all in and follow it completely, as you are putting your investment dollars at risk. There are rules to the strategy that help those using it score a high percentage of wins, but they need to be followed. If you cannot buy more options when the strategy calls for it, you are setting yourself up for failure and disappointment.

It is better to play fewer recommendations and buy fewer contracts going in, and take care of these 100%, than to buy several positions, and be stranded with no option but becoming a victim of market conditions. My success is based on being able to use the market to my advantage, not let the market take advantage of me.

Hi Lenny, I hope your hiatus is not TOO long, ...lol. I believe your profit would be $5,100, not over $10,000 for HSY. 300 contracts * 100 multiplier * 0.17 profit. I hope it comes through.

I am not planning on being gone for long, perhaps a month or two. Look for me to be back and recharged in January. As for Hershey, if my GTC sale order is filled for $1.60, you are correct, the profit will indeed be $5,100.

I want to assure readers that I intend to keep the Stat Book updated each week, so that loyal readers and followers of my DITM call recommendations will continue to benefit from published Next Buy Levels. I will be taking some much needed time off, but I do not have plans to leave my readers wondering how to manage their existing trades.

Lenny, I wanted you to know that your insight and clarity on making money in the market with options will be missed. I hope you return soon. Your strategy is clear, simple, actionable and very profitable. A true rarity in the media crazed world driven by the Internet where 99% is noise and you have to be flat-out lucky to find the 1% that's good info. I'm glad I found your column!

I want to thank you and all my loyal readers and followers of my DITM calls strategy once again. Sharing my strategy is deeply rewarding because of the appreciation my readers share with me.

When I discovered this loophole in the system, it made me want to broadcast it to the world so that others could benefit from the strategy. Writing for TheStreet.com has provided me the opportunity to share my strategy with those that are most interested in profitable trading. I cannot tell you all how great all of the people that work at TheStreet.com have been.