Bank of America Breaks $5; How to Play It

Shares of Bank of America

having just broke the Lincoln this afternoon. While shares had been chopping above the level for most of the session, shares have now breeched $5.00 on high volume. Currently, shares are trading $4.99, down by 4.04%. This break is notable for two reasons: first, $5.00 is the technical price where a stock trades as a penny stock (albeit stills trades on the NYSE, but anyway). This is the level at which large money manages can no long buy shares in the name (some managers, depending on their investment covenants, would also have to sell at this level). Second, this is the late-November support level. A break here gives Bank of America clear daylight to trade down to three-year lows. So…What's the Trade? While the picture looks bearish for the name, a snap back rally is certainly not out of the question this week. So a smart play would be to buy the Dec23 2011 weekly $5.00 straddle for $0.28 (5.65% of shares). Your max loss is the premium paid here, but the max gain is unlimited. Given the recent volatility in the name, a 5.65% move in the name (in either direction) is certainly not out of the question this week. Tax selling could push shares lower, or value buyer could step in. Either way, you would be ready to profit. Bank of America Corporation is a bank holding and a financial holding company. It is a financial institution, serving individual consumers, small and middle market businesses, corporations and governments with a range of banking, investing, asset management and other financial and risk management products and services.