My Favorite Trade

Here’s one for you. A Real Income Trader subscriber wrote to me last week:

Hi Brit! 

Hope this note finds you well. I don’t write often but have been a subscriber/follower/groupie for a LONG time…

In less than 2 months I was able to turn $400 into $4000 with some well-timed AMD and BAC options… So thank you for those and keep up the great work!!

If you don’t know by now that Bank of America (NYSE: BAC) is one of my favorite stocks for both trading and investing, well, I’m not doing my job very well.

Bank of America was one of the first stocks I recommended when I took over The Wealth Advisory back in 2012…

It was the perfect stock at that time — the kind you go “all in” on. We weren’t that far out of the financial crisis. People still HATED banks. But come on. What, BofA is gonna go out of business? Yeah, sure it is. 

The Wealth Advisory subscribers bought in around $9 a share. BofA shares moved over $30 last week. We are up ~250%, and new highs are less than 10% away. 

The investment thesis is pretty simple here. Bank of America has the largest deposit base in the U.S. It has reduced risk dramatically since the crisis days. Tier 1 capital is over 10%. That combination makes a repeat of the crisis very unlikely. 

There is huge upside for the dividend. Right now, BofA is paying $0.60 a year. That’s 2%, not great. But the payout ratio (the percentage of earnings it pays as dividends) is 20%.

For comparison’s sake, JP Morgan has a payout ratio of 30%. I say BofA has as much as 50% upside for its payment. That’s pretty good. 

And finally, Bank of America consistently trades at a 20% discount to book value when compared to JP Morgan. 

So I have the stock as a core holding in The Wealth Advisory. I’ve written it up numerous times over the years here in Wealth Daily. And it is also one of my favorite stocks for options trading in Real Income Trader.

Know Thyself

Now, most people don’t think about bank stocks for options trades. People tend to think options are fast moving, made for adrenaline-fueled momentum trading. And since bank stocks are kinda the opposite of adrenaline-fueled, most people wouldn’t think they’d be very good for options…

But I am not most people.

I traded my first options on Nokia stock back in 2000. I’ve been doing this a long time, and I’ve learned some things. The most important is: keep it simple. Look, I already know I’m stupid, so don’t even try it. But at least I’ve figured out how to play to my strengths. And that is critical for successful trading…

Because the market is good at exposing whatever weaknesses you might have. And you do have them. We all do. It’s part of that whole human thing. Maybe (like me) you suffer from premature allocation and tend to buy to soon. Maybe you hold losers too long…

Whatever the issue is, it is possible to take a couple simple steps to minimize the effect of our weaknesses. Accepting that we have them is the first step. 

That’s part of what got me to Bank of America. When I was younger, I thought options would work best on fast-moving momentum stocks. I’d get one really good trade off. And then I’d get creamed on the next three. I got frustrated that I kept making the wrong decision. It took me a while to realize that it was more the stocks I was trading and less my decision-making.

The basic issue was expectations. Momentum stocks have momentum because a bunch of investors have expectations: about earnings growth, about execution, about share price, whatever it might be. Options pricing always factors in expectations. And the higher expectations are, the more expensive the options will be. 

The reason I struggled was that I was buying expensive options that were more likely to lose value. 

I’ll let you in on a little secret, too: Before Real Income Trader, I hadn’t run an options trading service in nearly 10 years. And when Angel Publishing asked me to start an options service, I declined. I didn’t think I’d overcome my weaknesses…

That’s how Bank of America saved me.

Nobody Expects the Spanish Inquisition 

I’m not going to tell you I’ve eliminated my human weaknesses. But I will tell you that I’ve found a system that works for me (and apparently works for the guy who turned $400 into $4,000 in less than eight weeks).

I’ve always thought BofA was undervalued. Turns out the options are very cheap, too. And the stock is owned by a lot of institutions and such, so it’s kind of steady. I wouldn’t say the chart looks predictable. Thinking you can predict a stock move is one of those weaknesses we talked about…

No, I’d rather say BofA stock is regular. You look at the chart and you see regular moves. It ebbs and flows like the sea. (I’ve written about this here recently.)

So, an undervalued stock. Cheap options. Low expectations. I keep a small stable of stocks that I consider to be undervalued, with low expectations and cheap options. And it’s working great. We’ve closed three Bank of America trades this month for 210%, 133%, and 115%. And we got another 276% on Advanced Micro Devices (NASDAQ: AMD). 

We are now averaging over 50% on every trade we make. It’s fantastic. And if you’re thinking of trading options, we are in a groove at Real Income Trader.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.