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5 Banks to Consider as Options Plays

BAC Chart BAC data by YCharts

Bank of America (BAC - Get Report)

"Bank" is often one of the top 10 most actively traded stocks. Traders love trying to squeeze pennies out of it every day. Some are better than others, but that doesn't change the longer term moves investors can expect. The high activity rate for Bank results in investors having the ability to enter or exit from pre-market to the closing of the aftermarket session with almost zero slippage. I believe high activity lowers the transaction costs for everyone.

Book Value: $21.90

The price-to-earnings multiple demonstrates Wall Street doesn't believe Bank will grow earnings soon, but simultaneously, investors don't need growth to profit handsomely with shares as cheap as they are. On a positive note, the average one-year price target is $9.63 and short interest is very small at 2.1%.

The 60-day moving average is bullishly above the 200-day moving average. After testing the 200-day moving average support level several times this summer, BAC appears poised to continue moving higher.

The company currently pays a paltry 4 cents per share dividend for a yield of .5%. Absent an increase in dividends, don't expect to make a lot from the yield, but we don't need to in order to make bank with Bank.

The November $8 strike calls can be bought for about 53 cents, and $9 strike calls can be sold for about 19 cents. The options are priced relatively cheap considering the moves the stock has had recently. This makes a debit spread more attractive than a covered call in my opinion.

This type of option spread has an even lower risk than a covered call, while also lowering the time decay. With a current stock price of $8, the maximum possible return is 66 cents for a gain of 90% in less than 80 days. Bank will need to increase to $8.34 to breakeven by the expiration date, and the maximum risk is 34 cents per share.

If Bank is trading above $9 per share at expiration, you lose out on everything above $9 per share, but a 90% gain will aid in your comfort. Aside from the 34 cents per share risk, the next biggest downside to this strategy is Bank does have to move higher just to break even.
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