Economist and money manager Barry Ritholtz recently pointed out that about 65 percent of the banks in the U.S. are triple-A rated (and ratings agencies should know, right?), mostly small commercial and regional banks – on the whole, well run and profitable. But… about two-thirds of the assets in the country are held by the four or five largest banks.

Bank of America (BAC): one of the worst-ever acquisition track records. Countrywide and Merrill Lynch badly stretched BAC’s capital account. Years ago it acquired Continental Illinois, nationalized in 1984 and 1991. The bank-bank core of the company is solid, and seems to be well run. The problem is bad acquisitions, subprime loans and mortgage and credit defaults. The normal loan loss rate of 3% is now 8%, which is sailing pretty close to the wind. BAC has the least tangible (hurts if you drop it on your foot) assets of all the major banks.

Money manager Martin Sosnoff, who considers BAC stock a spicy piece of paper, lays out a fascinating lady-or-the-tiger scenario. In the bullish case, BAC could earn $20 billion annually, though note the problems above. The tiger scenario is that $30 billion of preferred stock and $51 billion in subordinated debt is converted into equity due to nationalization (um, restructuring) to pump up equity, and in a conversion the debt could be valued at 60 cents on the dollar. This dilution poses too much risk for buy-and-hold, and probably too much for covered writing.

JP Morgan Chase (JPM) is by far the strongest of the major banks, but we have to wonder if there aren’t black holes awaiting. Major bank balance sheets are seen through a glass, darkly; and that may be optimistic.

Covered calls on banks should be limited to the healthy regionals and perhaps JP Morgan, but be aware that sector rotation in banks, or financials generally, can take the wind out a bank stock’s sails pretty quickly, even if it happens to be doing well. If you’re bullish on a bank stock, use a variation of the protected covered call (add a 6-8 month put with low time value). BAC is just too risky, and Citigroup (C) is too cheap – just buy the stock if you want a thrill.