The collapse of SVB Financial Group and Silvergate Capital have caused bank stocks to take a hit. $Bank of America(BAC)$
But instead of being worried about the drop in stock prices, I see this as an opportunity to sell put options on Bank of America Corporation. Here's why:
Berkshire Hathaway's Bank of America Stake
Warren Buffett's position in Bank of America is currently worth $30.6 Billion. That's 9.55% of their entire equity portfolio and the second-largest holding. The investor owns 12.51% of the outstanding Bank of America stock. This shows that Bank of America is a reliable and long-term investment, which is why I want to own a stake in it anyway.
What is Put Option Selling?
Put option selling is a strategy used in the options market, where the seller agrees to buy an underlying asset, in this case, Bank of America Corporation stock, at a predetermined price (strike price) at a specific time (expiration date). The buyer of the put option has the right, but not the obligation, to sell the stock to the seller at the strike price.
What to Consider When Selling Put Options?
When selling put options, there are a few things to consider:
1. Strike price: The strike price is the price at which the seller is willing to buy the stock. In this case, I am planning to sell put options at a strike price of $25, which is below the current market price of Bank of America Corporation.
2. Expiration date: The expiration date is the date at which the option contract expires. I am planning to sell put options expiring in September 2023 and January 2024.
3. Premium: The premium is the price the buyer pays for the option contract. As the seller, I will receive the premium and keep it if the put option is not exercised. BAC needs to go down another 17.4% to reach the strike price of $25.
Why I am Selling Put Options on Bank of America Corporation
Selling puts generates immediate portfolio income to the seller, who keeps the premium if the sold put is not exercised by the counterparty and it expires out of the money. An investor who sells put options in securities that they want to own anyway will increase their chances of being profitable.
Based on the day chart above, the next support region for Bank of America Corporation should be around 26. Selling put options at a strike price of 25 expiring in September 2023 $BAC 20230915 25.0 PUT$ $BAC 20230915 25.0 PUT$ and January 2024$BAC 20240119 25.0 PUT$ $BAC 20240119 25.0 PUT$ , currently priced at $1.02 and $1.49, respectively, can help me collect around USD100 and USD145 of premium from each contract. I am expecting the price of these options to increase with the stock dipping further next week. However, I am not sure how low Bank of America Corporation will go if a bank run happens next week, but I don't mind holding it for the long term as it pays some dividend (currently 2.84%) as well.
Conclusion
In conclusion, the collapse of SVB Financial Group and Silvergate Capital may have caused bank stocks to take a hit, but it doesn't mean that there aren't opportunities to make money. By selling put options on Bank of America Corporation, I can generate immediate portfolio income and add a quality stock like BAC to my portfolio.
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