It hardly needs to be pointed out that the banking industry has offered tremendous opportunities for profit to traders, particularly those who are spread betting, in recent years. However, as always, it has been a matter of timing, and whether to go long or short on the stocks.
The Bank of America has suffered as much as any from the global economic downturn in 2008. You can see that a high of around 5500 dropped to about 250 at the peak of the recession, and that recovery since has been stalled. The fact is that some of the financial industry’s practices are only now coming to light, and coupled with additional scrutiny following the collapse, it may take years to rebound. The European debt crisis continues to exert pressure on the markets which is felt by major banks, and has no easy resolution.
The Bank of America has severely under performed its market sector in the last few years, even though in 2012 it has shown steady performance. So it has not done as well as an already stricken market sector. However, given its size and importance it was always going to be rescued as a “too big to fail” corporation.
But with a publicly hardened line towards bankers, who still seem to be collecting their massive bonuses despite their companies’ performance, the safety nets of the past may disappear. One of the problems for Bank of America was its acquisition of the mortgage lender Countrywide in 2008, which turned out to be a much larger problem than had been anticipated. However, there is reason to believe that, market sentiment aside, the book value of Bank of America should be much closer to $20 per share (2000 in the chart above), and so over time there should be a general uptrend.
When you’re spread trading on Bank of America shares, bear in mind that they are subject to dramatic moves in line with market and public sentiment, and be careful to protect your capital. Follow the technical analysis to see which way the market is leaning at the time of your trading.
Bank of America Rolling Daily Spreadbet
The current price of a rolling daily bet on the Bank of America stock is 902.0 – 905.0. If you think that the market is due for another correction, with prices falling, you may wish to place a sell or short bet on this security, staking perhaps £2.50 per point. Due to its volatility, you need to be cautious when spread trading on stocks such as this.
If your bet works out, and the price falls, you may find the opportunity to take your profit when the price goes down to 772.5 – 775.5. Your winnings are simply the product of the points won and your stake. Your bet was placed at the initial price of 902.0, and it finished at 775.5. That means that you have gained 126.5 points with your short bet. Multiplying by your bet size, your winnings should amount to £316.25.
Some of the time your bets will not work, so you should also be able to calculate how much they will cost you. Perhaps in this case the price went up to 986.3 – 989.3 before you decided that you had to close the bet and cut your losses. With a starting price of 902.0, and the finishing selling price of 989.3, you would lose 87.3 points. At a bet size of £2.50 per point, the bet would cost you £218.25.
An alternative you should consider for closing a losing bet is the stop loss order. This means that your spread betting provider will close a losing bet for you, even if you’re not watching the market, so many traders find it a convenient form of insurance. You are free to set the level of price that you want, although unless you pay extra for a guaranteed stop loss, you are not sure that your bet will be closed exactly at the number you state. With the stop loss order, you might find that this bet was closed out at 963.2 – 966.2, losing you 966.2 minus 902.0 points, or 64.2 points, which would cost you £160.50 for your bet size.
Bank of America Futures Spread Betting
As an example of a futures style bet, note that the current spread betting quote for Bank of America for the far quarter is 898.3 – 910.1. You might decide that the prospects are good, and make your mind up to take a long bet. Although a daily rolling bet usually attracts a service charge in the evenings when the bet is rolled over, you do not have the same with a futures style bet, which costs you nothing all the while you hold it open until expiry. Say you stake £1.50 per point.
If your long bet turns out to be right, the price may go up to 1036.2 – 1044.0, and you could decide to take your profits. Note that it does not matter if this happens in the next day, next week, next month, or a day before the expiry; you are entitled to cash in your bet at any time. In this case you have gained 1036.2-910.1 points, or 126.1 points. At £1.50 per point this amounts to a profit of £189.15.
However, if your bet is wrong, and the price drops, you may find that you need to cut your losses when the quote is 803.2 – 812.1. You can work out how much you lost in exactly the same way. The starting price was 910.1, and the closing price was 803.2, for a loss of 106.9 points. For your chosen stake this amounts to £160.35 that you have lost.
To save you keeping an eye on the market all the time, you could set a stoploss order to watch the price for you. Now if the bet becomes a loser, you may find that it was closed at a level of 818.7 – 830.3. The starting price was 910.1, as before, but the bet was closed at 818.7. This means you lost 91.4 points, for a cash loss of £137.10.