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Bank of America Corp (BAC) Halo Lift Sparks Pre-Earnings Call Buying

BAC bulls are buying short-term calls ahead of Wednesday's earnings release

by 4/15/2013 11:04 AM
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Financial concern Bank of America Corp (NYSE:BAC) is one of the elite Dow components in the black this morning, up 0.9% at $12.28. It appears traders are waxing optimistic ahead of the company's turn in the earnings spotlight later this week, with speculators scooping up short-term call options at a rapid-fire rate. So far today, BAC has seen about 79,000 calls change hands -- almost four times the number of puts exchanged.

Most popular has been the April 12.50 call, which has seen roughly 14,600 contracts cross the tape at a volume-weighted average price (VWAP) of $0.12. Implied volatility is more than 4 percentage points higher, and a large portion of the calls traded on the ask side, hinting at buy-to-open volume.

By purchasing the calls to open, the buyers expect BAC to power north of $12.50 by the end of the week -- which encompasses Bank of America Corp's (NYSE:BAC) quarterly earnings release on Wednesday, April 17. More specifically, the buyers will begin to profit if BAC topples the $12.62 level (strike price plus VWAP) by Friday's close, when April-dated options expire. However, should the stock remain south of the strike, the most the buyers can lose is the initial premium paid for the calls.

What's more, now appears to be a good time to roll the dice with Bank of America options. The equity's Schaeffer's Volatility Index (SVI) stands at 28%, above just 9% of all other readings of the past year. In other words, BAC's short-term options are still relatively cheap right now, even with earnings on the horizon. Echoing that, the stock's Schaeffer's Volatility Scorecard (SVS) rests at a lofty 83, implying that BAC options are attractively priced, compared to the probability of an outsized move on the charts.

From a sentiment standpoint, today's appetite for short-term calls runs counter to the trend. The security's Schaeffer's put/call open interest ratio of 1.11 sits just 7 percentage points from a 52-week peak, implying that near-term options players are more put-heavy than usual right now.

Fueling the relatively rare affinity for bullish bets -- as well as BAC's ability to buck the early broad-market downtrend -- is a stronger-than-expected earnings showing from sector peer Citigroup Inc. (NYSE:C), which has likely bolstered optimism ahead of Bank of America's own earnings release. For the quarter, analysts are calling for a per-share profit of 22 cents. The company has exceeded the Street's bottom-line earnings estimates in three of the past four quarters.


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