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Bank of America Corp (BAC) Traders Forecast New Near-Term Highs

Front-month call volume spikes on BAC

by 7/31/2013 1:56 PM
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Bank of America Corp (NYSE:BAC) is following the broader market higher today, gaining about 1.3% to trade at $14.72. This positive price action may have prompted a number of traders to wager on a new multi-year high for the security over the course of the next few weeks.

Jumping right in, of the 89,000 calls that have crossed the tape during today's session, nearly 15,300 have done so at the August 15 strike for a volume-weighted average price (VWAP) of $0.16. A healthy portion of these contracts traded at the ask price, and implied volatility has ticked higher -- underscoring our theory of fresh bullish bets. What's more, data from the International Securities Exchange (ISE) confirms that at least some of this volume is comprised of newly added positions.

By purchasing these calls to open, traders are expecting BAC to power north of breakeven at $15.16 (strike price plus the VWAP) by front-month expiration. This reflects a rise of 3% from current levels, as well as territory not explored since January 2011. The delta for these options sits at 0.36, meaning they have a more than 1-in-3 chance of finishing in the money. Also of note, the stock's Schaeffer's Volatility Index (SVI) of 23% ranks lower than all but 7% of similar annual readings, implying the equity's front-month options are relatively cheap right now.

However, not everyone is feeling the love for BAC. The financial giant's 50-day ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.43 ranks higher than 94% of similar annual readings, meaning traders have been snapping up puts relative to calls at a near 52-week high. This bevy of bearish bets -- particularly at the underfoot August 14 strike, which holds open interest of more than 62,000 contracts -- could end up translating into options-related support down the road.

From a technical perspective, Bank of America Corp (NYSE:BAC) has gained close to 27% year-to-date, and has nearly doubled in value during the past 12 months. On the charts, the shares continue to trade atop their 10- and 20-week moving averages, which have served primarily as support since August 2012.


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