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Option Idea of the Week: Bank of America

Can BAC extend its quest for new highs?

by 1/4/2013 10:56 AM
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Financial concern Bank of America Corp (NYSE:BAC - 11.98) has emerged as a broad-market standout of late, outpacing the S&P 500 Index (SPX) by almost 28 percentage points during the past three months. Nevertheless, Wall Street remains wary of the security -- which could point to ample contrarian fuel in BAC's tank.

On the charts, the stock has muscled more than 70% higher since skimming the $7 level in late July, ushered higher atop its 10-day and 60-day moving averages. In fact, BAC just tagged a fresh annual high of $12.15 earlier this week, and was last seen trading within a hair's breadth of this level.

Daily Chart of BAC since July 2012 With 10-Day and 60-Day Moving Averages

Fundamentally, the fiscal-cliff deal has been a boon for BAC, as noted by analysts at JMP Securities, who upgraded the stock to "market perform" from "market underperform" on Jan. 3. In addition, Guggenheim lifted its price target on the equity to $14 from $12, while Evercore added BAC to its conviction list and named the company its top pick among large-cap banks in 2013.

However, there could be plenty more upbeat analyst notes on the horizon. Currently, just nine out of 26 brokerage firms deem BAC worthy of a "buy" or better endorsement, leaving the door wide open for additional upgrades to fuel further gains. In similar fashion, the consensus 12-month price target on the stock stands at a meager $10.60, representing a discount to BAC's current price, and hinting at future price-target boosts to lure buyers.

Elsewhere, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.75 sits just 12 percentage points from a 52-week peak. Or, in simpler terms, short-term options players have rarely been more put-heavy on BAC during the past year. An unwinding of pessimism in the options pits could act as a contrarian tailwind for the stock.

Digging deeper, we find that peak put open interest in the front-month January 2013 series rests at the 10 strike, with more than 386,000 puts in residence. In the short term, this abundance of out-of-the-money, bearish bets could translate into an options-related foothold for BAC.

Investors expecting BAC to extend its quest for new highs should consider buying the stock's in-the-money April 10 calls, which were last asked at $2.21. In fact, the security's Schaeffer's Volatility Scorecard (SVS) currently stands at 100, suggesting BAC's options are relatively inexpensive relative to the probability of an outsized move on the charts.


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