Reflecting on my BAC options trades. What I did right. What I did wrong. What I am going to do next.
BAC is the symbol for Bank of America. It is one of the largest banks in US. It was mentioned as a good solid stock in a webinar I attended.
Learning to Evaluate BAC
At the beginning of 2022, I attended a course called Options Millionaire Intensive (affiliate link). OMI is a 3-day live / virtual bootcamp. I learnt some interesting investing concepts and strategies. One of them is a checklist for evaluating whether a company is good.
- Operating cashflow (OCF) of a good company should be consistently positive. A bonus if it is growing.
- Net profit margin should be positive. 10% and more to be considered good.
- Interest coverage ratio should be positive. The larger the number the better. Nil is also good. It means the company has no loans.
- The current year Price/Earning ratio (PE) should be lower than the 5-yr PE
- The current year Earning Per Share (EPS) should be higher than the 5-yr EPS
- The Value line should be higher than the current share price. This means that the company shares could be trading at a discount.
Applying the OMI Checklist to BAC
- BAC’s operating cashflow is positive until 2021. TTM OCF is (-7,193 mil).
- BAC’s net profit margin % was in the 20s for the last 4 years and 34.29 in 2021. A very comfortable margin.
- Interest coverage ratio is zero. BAC has no loans.
- BAC’s current PE is 11.50 while 5-year PE is 13.90.
- The current EPS is $3.57
- The value line is 13.90 x 3.57 = $49.62 which is higher than the share price of $42.90.
BAC’s profit margin is healthy and it has no loans. Its share price is slightly below the value line. It’s operating cashflow is a bit concerning though.
Following the instructions of OMI workshop, I sold a put option.
11 Feb 2022 – sold 1 put option with strike price $47.50 expiring 18 Feb 2022 for a premium of $34. Assigned. Profit: $34
I was assigned 100 shares for a cost of $4,750. I collected $34 which means my actual purchase price is ($4,750-$35)/100 = $47.15
My BAC options strategy is the Covered call. Sell call options until the stock gets called away because it is not a stock I want to hold long term.
Covered Call Options
2 Mar 2022 – sold 1 call option with strike price $47 expiring 1 April 2022 for a premium of $44. Closed on 7 Mar 2022 for $7. Profit = $37
7 Mar 2022 – sold 1 call option with strike price $43 expiring 1 Apr 2022 for a premium of $38. Closed on 21 March for $110. Loss: $72
After I sold the 7 March call option, BAC experienced a significant price uplift to $42.90. This was very close to my strike price. If the stock is called away, my loss would be $4,715-$4,300 = $415. Although I have 2 weeks more, I decided to close the losing trade early. I kept looking at it and thinking about it. I made a slight loss of $72.00.
The share price subsequently fell but I didn’t manage to catch the opportunity to sell calls after the recent 7 March call option fright.
June 2022
BAC share price is currently $36.30 making it difficult to sell calls without risking major loss. But I will monitor for good risk/reward opportunity.
The data I used for evaluation are sourced from Firstrade.com and Moomoo (affiliate link). I have trading accounts with them and it includes access to relevant company and market information.
