BAC (Watch)...

I'm adding BAC to the watchlist today. It's neither long nor short, but a stock to watch. With the reports of WFC and USB coming up tomorrow morning, I think it's a good time to be out of big financials. What interests in BAC is the volatility squeeze we're seeing. That's just a fancy way of saying that the price range is narrowing. We can see this by how the Bollinger Bands are tightening. We can also see it in how BAC is trading between the 50-day and 200-day EMAs, but they're converging on each other. The thing with volatility squeezes is they eventually yield volatility expansions. That's just a fancy way to say the price range will expand. But how do we know which direction the price will expand? We don't.

There are a few ways to play this. If you're trading short-term (a few days) you can play the range between the 50-day and 200-day EMAs, and if you're doing that, now's the time to buy. If you're trading intermediate-term (weeks or more), wait for the volatility squeeze to decisively resolve itself, then pick sides (if it goes above the 200-day EMA, buy, and if it goes below the 50-day EMA, short). Or we could do a complex options play called a strangle. When buying a strangle, you're betting on a volatility expansion, so you buy a call and a put. Since we're at the bottom of the range, I'll be looking to leg into the calls because they're cheaper right now, and when we rally, I'll look to leg into the puts because then the puts will be cheaper. I'll probably buy more calls than I otherwise would (or additional, but different calls) and sell them once BAC returns to the top of the range.



Position: none