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Bullish Bettors Take a Shine to Bank of America Corp (BAC)

BAC finds an audience with both short- and long-term call players

by 7/11/2013 11:21 AM
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Bank of America Corp (NYSE:BAC) has already seen a flurry of bullish options activity today, as roughly 111,000 calls have crossed the tape thus far -- almost double the norm. By contrast, around 35,000 puts have changed hands. A closer look at the action shows that the call players represent a mix of short-term and longer-term traders, with both groups expecting the banking giant to maintain its upward trajectory.

Jumping right in, around 25,300 calls have been exchanged at the July 14 strike for a volume-weighted average price (VWAP) of $0.10. The majority of the contracts traded at the ask price, and implied volatility has climbed 3 percentage points -- underscoring our theory of buy-to-open activity. In other words, speculators are counting on BAC to climb north of breakeven at $14.10 (strike price plus the VWAP) by the close on July 19, when these front-month options expire.

The delta for these calls rests at 0.24, meaning they have a 24% chance of finishing in the money. Still, should the shares remain south of the $14 level, the call buyers can rest easy knowing that the most they stand to lose is the initial premium paid. What's more, the security's Schaeffer's Volatility Index (SVI) of 31% registers lower than all but 29% of similar 12-month readings, suggesting BAC's front-month options are relatively inexpensive right now.

Meanwhile, longer-term bulls are focusing on the January 2014 18-strike call, which has seen nearly 14,000 contracts exchanged at a VWAP of $0.09. Since the vast majority of the calls crossed off the ask, and implied volatility has ticked higher since the opening bell, it's likely that new long positions were added here, as well. In this scenario, however, traders will profit if BAC ascends past the $18.09 mark by January expiration. This denotes an increase of 35% from the equity's current perch at $13.40.

This campaign for calls over puts marks a change of pace for Bank of America Corp (NYSE:BAC). In fact, the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.44 is just 3 percentage points below an annual acme, meaning traders have rarely picked up puts relative to calls at a faster pace during the past year. This heavy accumulation of bearish bets -- particularly at the underfoot July 12 strike, which holds peak front-month put open interest of nearly 87,400 contracts -- could end up translating into options-related support in the near term.

Technically speaking, BAC has advanced close to 15% year-to-date, and more than 76% on a year-over-year basis. On the charts, the stock continues to trade above its 20-week moving average, which has acted as a floor since August 2012. It should also be noted that the firm is on tap to report quarterly earnings before the open on July 17, and has bested consensus estimates in three of the past four quarters.


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