Bank of America - Opportunity to Profit

Bank of America Corporation (NYSE:BAC) continues to dominate the financial news world, and the stock price has been increasing.  You may be interested in picking up a few shares, but are concerned about a quick drop in price.  Well here is a strategy you can employ to make some money and give yourself some good protection in case the stock does drop.

Based on rates recently checked, buying 100 shares of BAC for $17/share and then selling the $16.00 Sep 2009 Call (BYOIP) contract for $1.64 could net you 4.17% profit if BAC closes above $16.00/share at the expiration date in 37 days.  Not bad for about 1 month of investing and your average monthly gain would be 3.48%.  Additionally, you would have a big downside protection to $15.36, or about a 9.65% drop in stock price.

The Compound Annual Growth Rate (CAGR) on the assigned option position is 49.6%, which is better than the average overall long term market return of 10%.

Possible Strategy if BAC drops 9.65% 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 Sep 2009 Call contract and then selling another call at a lower strike (say the $14.00strike) and/or further date out to make up for any losses caused by having to buy the $16.00 Sep 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 less than $16/share when you were originally interested in buying at $17/share, sort of sounds like a win/win situation to me.

Disclaimer: No positions in BAC or options of BAC.