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Bank of America Corp (BAC) Bulls Have High Short-Term Hopes

Bank of America Corp is struggling to fill its late-April bear gap

by 5/29/2014 2:40 PM
Stocks quoted in this article:

Bank of America Corp (NYSE:BAC) is fractionally lower at $15.11 this afternoon, bringing its year-to-date loss to nearly 3%. However, options traders today are rolling the dice on a short-term ascent for the banking concern.

The most active option by a landslide is the weekly 6/6 15.50-strike call, where close to 13,600 contracts have changed hands. More than three-quarters of the calls crossed on the ask side, implied volatility is trending higher, and volume has surpassed open interest at the strike. In other words, it appears the weekly calls are being bought to open.

Digging deeper, the calls traded at a volume-weighted average price (VWAP) of $0.06. As such, the buyers will profit if BAC is docked atop $15.56 (strike plus VWAP) at next Friday's close, when the options expire. In fact, profit potential is theoretically unlimited north of this breakeven level. Maximum risk, on the other hand, is the initial premium paid, should BAC remain south of the strike through the option's lifetime.

In the wake of today's dip on the charts, delta on the call has dropped to 0.21 from 0.23 at Wednesday's close, implying a 21% chance of the contracts expiring in the money. However, even if the calls expire worthless, the buyers can rest easy knowing they scooped up the contracts at a relative discount. BAC's Schaeffer's Volatility Index (SVI) of 19% stands higher than just 21% of all comparable readings from the past year, suggesting the stock's short-term options are inexpensive right now, from a historical standpoint.

On the sentiment side, today's appetite for BAC calls merely echoes the growing trend. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 4.35 rests in the top quartile of its annual range, suggesting speculators have bought to open BAC calls over puts at a faster-than-usual clip during the past two weeks. Likewise, the security's Schaeffer's put/call open interest ratio of 0.57 sits just 6 percentage points from a 12-month low, implying that short-term options players have rarely been more call-biased during the past year.

This optimism seems out of place juxtaposed with BAC's performance on the charts. The shares have underperformed the broader S&P 500 Index (SPX) by nearly 14 percentage points during the past two months, and continue to stare up at their 200-day moving average. This trendline -- last seen in the aforementioned $15.50 neighborhood -- hasn't been conquered since April 25, the session before BAC's bear gap, which was the result of a miscalculated capital plan.

Off the charts, Bank of America Corp (NYSE:BAC) recently resubmitted said plan to the Fed, and its Merrill Lynch division last week emerged on the Securities and Exchange Commission radar for possible violations of anti-money laundering rules. Meanwhile, BAC's sector peers are under scrutiny amid allegations of overcharging on foreclosure fees. Should the equity continue to falter, a mass exodus of option bulls could exacerbate selling pressure on the stock.

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