Afraid to Invest in Bank of America?

 Are you afraid to invest in Bank of America Corporation (NYSE:BAC)?  Well, you are not the only one.  Wouldn’t you prefer to invest with a margin of safety?  Aren't you tired of buying a stock only to have it drop the very next day?  Consider selling a stock option via your online broker to create substantial margin of safety on the stock you buy.  The best part is that you get your desired return up front instead of “hoping” for the stock to go up to get your return.  Read on to learn how you can make this happen.

 Based on rates recently checked, buying 100 shares of BAC for $17.35/share and then selling the $16.00 Nov 2009 Call (BYOKP) contract for $2.61 could net you 8.33% profit if BAC closes above $16.00/share at the expiration date in 89 days.  Not bad for 3 months of investing and your average monthly gain would be 2.88%.  Additionally, you would have a big downside protection to $14.77, or about a 14.87% drop in stock price.

The Compound Annual Growth Rate (CAGR) on the assigned option position is 38.8%, which is better than the average overall long term market return of 10%.

Possible Strategy if BAC drops 14.87% and closes below $16.00:
If BAC closes below $16.00 at any time during the trade, you can roll down the position by purchasing back the $16.00 Nov 2009 Call contract and then selling another call at a lower strike (say the $14.00 strike) and/or further date out to make up for any losses caused by having to buy the $16.00 Nov 2009 Call back.  If the stock recovers, you should be able to simply sell out of the position for even money if you don't want it tied up in the positions.

If it continues to drop, you now own the stock for much less than $16.00/share when you were originally interested in buying at $17.35/share, sort of sounds like you can't really lose.

Disclaimer: No current positions in Bank of America Corporation (NYSE:BAC).