[Options] Going Where the Money Is

Sean McLaughlin
November 9, 2022

“Why do you rob banks?” authorities asked notorious bank thief Willie Sutton.

His response: “Because that’s where the money is.”

We're not planning on robbing anybody, but if today's trade plays out like we think it can, it might feel like we're stealing. Only, we won't need to worry about the authorities coming after us, nor will we need to feel bad about it.

Our Analyst Willie Delwiche says that a basic requirement for many bullish ideas right now is that any stock or ETF in question needs to be above August highs. Anything below August highs is subject to a rude reversal. I'm on board with this line of thinking.

So, today's trade is in an American bank that is above its August high and showing signs of wanting more.

I'm told rising interest rates are good for banks. That may or may not be true, but the team here at All Star Charts sure likes the relative outperformance of banks and financials. Check out these charts:

The chart above shows the relative outperformance of the Financials sector ($XLF) compared to the Russell 3000 ($IWV).

And here's Bank of America, $BAC:

If $BAC gets a head of steam heading into and through the new year, it's not out of the question that it can make a run at its highs near $50 per share from last February. And as you can see below, implied volatility in $BAC options has been trending lower in recent weeks, making a long calls play a more affordable and attractive way to play for this run:

Let's do it!

Here's the Play:

I like buying $BAC April 43 calls for about $1.00 per contract. This premium we pay upfront represents the most we can lose in this trade if $BAC goes sideways or down from here. But these out-of-the-money calls currently sport a 25 delta, which means if $BAC starts moving up, we'll get a tremendous bang for the buck if it targets yearly highs near $50 per share.

That said, if $BAC can't maintain above $34.50, then I'll look to exit the trade if there is any premium left to sell. That is my signal that I'm either early or wrong, both scenarios being bad for these long calls.

If $BAC starts motoring higher, then I'll look to sell half of my position at double the price I paid today -- so, at $2.00 per contract. This will leave me with a "risk-free" position that I can safely and confidently hold until April and participate in the possibility of unlimited gains.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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