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Bank of America Corp (NYSE:BAC) touched a new two-year high of $14.99 yesterday, and closed just below that mark at $14.92. The positive price action -- which received an ovation from at least one group of option traders -- led other investors to employ a couple of neutral-to-bullish strategies.
The most popular strike was the August 16 call, where close to 29,000 contracts traded at a volume-weighted average price (VWAP) of $0.06. Over 90% of the calls traded at the ask price, and open interest added 16,000 contracts overnight, by which we can conclude that new long positions were created. For the traders to profit, BAC shares need to continue their ascent and hit what would be a three-year high of $16.06 (strike price plus VWAP), by front-month expiration. If the stock finishes south of the strike, the most they can lose is the premium paid -- which is relatively modest, given the near annual-low Schaeffer's Volatility Index (SVI) reading of 22%.
Another bullish speculator took a different approach to Bank of America. Rather than going long, he assumed a short position by selling to open a block of 6,500 May 2014 12-strike puts. This is evident based on the fact that the transaction went off at the bid price of $0.41, and open interest surged overnight. As such, so long as the stock remains above the strike, the trader stands to keep the premium paid, which represents the maximum profit for the play. If BAC tanks, however, the trader may be required to purchase the shares for $12 apiece, regardless of how low the stock falls between now and May expiration.
From a wider sentiment perspective, pessimism appears to be prevailing toward BAC. The stock's 50-day put/call volume ratio is 0.43, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The ratio ranks in its 95th annual percentile, demonstrating puts are being bought over calls at a significantly higher rate than usual.
Elsewhere, among brokerages covering Bank of America, 16 out of 24 rate the equity a "hold" or worse. On top of that, the consensus 12-month price target is $14.23, which represents a discount to the shares' current perch.
On the charts, however, Bank of America Corp (NYSE:BAC) has tacked on 110% year-over-year. More recently, the financial name has outperformed the broader S&P 500 Index (SPX) by nearly 13 percentage points through the past 20 sessions, and tagged a fresh record peak of $15.03 right out of the gate today. Should the stock maintain that type of performance, a round of analyst upgrades and/or price-target hikes could send the shares to new heights.