Last Friday I noted the market had reached a point where the financials are “stupid cheap”. Maybe they go lower but I can play it and not lose money. How? Very simple if you use options.
Our second recommendation since we have returned to this blog was to buy Bank of America $BAC and at the same time buy puts. Puts = insurance.
Bank of America was at $13.21. So we recommended to buy 100 shares and then buy 2 puts to hedge our position. This is more than the tradition hedge which would be 1 put for each 100 share. I am prepared to be early and 2:1 put protection ensures this fact.
We recommended the March $13 Put for 0.59. So we added $118 to our cost of 100 shares which is $1321. I am willing to give up $1.18 on the upside for protection on the downside.
We noted on Friday that we would diagram this trade as we ride it. Bank of America $BAC is now at $12.16 so on the purchase of 100 shares the recommendation has lost $105. The puts are now worth $1.26 so each put is higher by $0.67 or $67 per option. We own 2 puts so the gain is $134 against the stock loss of $105, we are up $29. Such a deal.If you enjoy the content at iBankCoin, please follow us on Twitter