One of the simplest ways to make money is doing more of what works and less of what doesn’t. It seems like common sense, but most people do the opposite.
They double-down on losers in hopes the stock will turn around rather than admitting their mistake, cutting losses and rebuilding that which was lost in a winning stock. The key is to take losses quickly, and let winners ride.
In this spirit, consider initiating a bullish call position in Bank of America (ticker: BAC). The call options will pay off if the stock continues to rise in the new year as the company gets healthier and puts the worst of the credit crisis firmly behind it.
Regular readers will recognize the stock as a perennial favorite. It has appeared in this column for years as a solid moneymaker as the megabank’s stock price has clawed its way back from the single digits to its current price north of $16.
Now it is time to dust off the whole-number trading strategy, which is simply to buy calls in anticipation the stock trades up to the next whole number. With Bank of America at $16.55, close the position recommended here last November – to buy January $16 calls for 25 cents – when the stock was at $15.23 (see Striking Price, “Bank of America Stock May Break a New Barrier,” Nov. 20, 2013). The calls are now trading at 70 cents.
It’s also OK to close the January $15 calls recommended in late October (see Striking Price, “Bank of America Stock: How to Profit as It Rises,” Oct. 24, 2013), which are now trading at $1.12 cents, up 286% from their 29-cent purchase price.
Investors can redeploy profits and buy Bank of America’s February $17 call recently trading at 33 cents. If you want to enhance the trade to a more distant expiration, you can buy May $16 calls and sell May $18 calls, for an all-in cost of 68 cents when the stock was trading around $16. The longer-term call offers a bigger payoff, and the call sale reduces the cost of the position.
The whole-number Bank of America trade is about as simple as it ever gets and, better yet, the trade tends to work. So keep buying upside bullish calls in anticipation the stock keeps on rising. The trade has proved to be a winner more often than not. And even when the trade has been a loser, the pain is eased by the fact that the calls usually trade for 50 cents or less.
Comments: steve.sears@barrons.com
Steven Sears is the author of The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.
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Bank of America Trade: Still a Moneymaker – Barron’s
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