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BAC Bull Spread


west
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Hopefully I'm not bringing up something that's already been discussed, but what are your guys' thoughts on a BAC bull spread?  Today (approximately) you can buy 2014 $12 LEAPS for $1.55 and simultaneously sell $15 LEAPS at $0.89.  Meaning, you can setup a $12/$15 bull spread for about $0.66.

 

Assuming I'm doing my math right, this means that if BAC gets at or above $15 in the next 22 months (likely, in my opinion, assuming Europe doesn't explode), you'll have an upside of about $3/0.66 = 4.5x, versus a gain of just 50% if you just hold the inderlying common, at today's price.

 

Besides the obvious of "options may expire if the market doesn't get above $12 in that time" arguement, is there anything I'm missing here?  Or is this really as good as it seems?

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One problem that I have seen with bull spreads is of timing.

 

For your example, if BAC goes to $15 much quicker than by the expiration date, the $12 call will lose most premium while the $15 call will gain a lot. The $12 call could be worth something like $3.50 while the $15 call would be worth around $1.75.

 

So your gain becomes $1.75 on a $0.66 investment which is still much better than the common. However, you will still feel stuck to make a decision on when to exit because if the stock remains at $15, you would make more waiting for the expiration, but it could also pull back to $13 right at the expiration date. So there is a difference between the theoritical calculation and how it works in practice.

 

Another issue is the size of the investment. Would you be comfortable to put a lot of your hard earned money in this investment or strategy? If not, then even if a 50% gain in BAC looks much smaller, it could turn out into a much bigger $ gain by plowing more money directly into BAC. Stress will also be much lower since there would be no timing issue.

 

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