Bank of America is a high-dividend stock that recently broke back above its all-important 200-day moving average. Shares have gained 19% in the last month, but remain roughly 7% below their 52-week high.
Impressive price action and consistent dividends can make this stock attractive for investors looking for reliable income rather than chasing high-volatility trades. And a cash-secured put option trade stands as one way to take ownership of a stock for less than the current price.
Let's take a look at how a cash-secured put trade might look on Bank of America stock.
How The Cash-Secured Put Works
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of Bank of America stock at a price of 44.50 any time between now and June 20.
Selling a June 20, 44.50-strike put would generate around $115 in premium. The put seller would have the obligation to purchase 100 shares of Bank of America stock at 44.50 if called upon to do so by the put buyer.
Traders calculate the break-even price for the transaction by taking the strike price, less the premium received. In this case, that gives a break-even price of 43.35, or 3.2% below Monday's close.
If the stock stays above 44.50 at expiry, the put expires worthless. That leaves the trader with a 2.7% return on capital at risk. It works out to around 30% on an annualized basis.
Similar To Outright Ownership
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. But the loss gets partially offset by the premium received for selling the put.
The maximum loss on the trade occurs in the unlikely event that Bank of America stock fell to zero. That would see the trade lose $4,335, but most traders would cut their losses beforehand.
Cash-secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own.
With assignment of the put, the investor takes ownership with a reduced cost basis. The investor also can potentially begin selling covered calls to generate additional income from the position.
Bank Of America Stock Ranks No. 10 In Its Group
According to the IBD Stock Checkup, Bank of America stock ranks No. 10 in its group and has a Composite Rating of 87, an EPS Rating of 90 and a Relative Strength Rating of 68.
Bank of America has already reported first-quarter results, so there should be no earnings risk with this trade. Our last cash-secured put trade on Citigroup has done well and can be closed early for close to a full profit.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is very conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
