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Bank of America Corp (BAC) Bulls Brace for New Highs

Bulls expect BAC to hit new annual high

by 5/6/2013 1:30 PM
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Bank of America Corp (NYSE:BAC) -- currently perched at $12.81 -- has gained more than 65% over the past year, and so it comes as no surprise that bullish traders are eating up the stock's call options. So far today, roughly 451,000 calls (three times the daily norm) have crossed, compared to the approximately 102,000 puts exchanged.

Among today's spotlight-stealing options for BAC is the May 13 call, where around 91,800 contracts have changed hands at a volume-weighted average price (VWAP) of $0.10. Because 64% of these contracts went off at the ask price, and implied volatility has risen 5.1 percentage points to 27.3%, we can assume that the majority of the calls are being bought to open.

In order for these option players to earn a profit, BAC has to creep north of its 52-week high of $12.94, and finish above the breakeven price (strike price plus the VWAP) of $13.10 by the close on May 17, when front-month options expire. However, if BAC remains at or below the 13 strike, all the option players stand to lose is the initial premium paid.

Though traders -- from a broader sentiment standpoint -- have been buying more calls over puts, the rate at which they are buying the calls is mighty close to an annual low. According to BAC's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 10-day call/put volume ratio of 1.79, traders have been snatching up nearly two times more calls than puts during the last two weeks. This ratio ranks in the 3rd percentile of its annual range, meaning traders have rarely shown less interest in Bank of America Corp calls relative to puts.

On the same note, Schaeffer's put/call open interest ratio (SOIR) for BAC stands at 1.39, which ranks higher than 99% of similar readings taken in the past year. Simply stated, short-term options traders have rarely been this put-heavy toward the equity.

In today's trading, BAC is comfortably higher, up about 4.6% despite a report that the New York attorney general's office plans to sue the bank for alleged violations of a $26-billion mortgage settlement.


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