Stocks quoted in this article:
Although Bank of America Corp (NYSE:BAC) continues to make its way up the charts, option players have displayed a growing appetite for long puts of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio has grown to 0.58 from its June 10 reading of 0.47. Even more telling, the current ratio ranks higher than all other such readings taken in the last year, indicating puts have been bought to open over calls at an annual-high clip in recent weeks.
Monday's put players eyed some near-term downside, and scooped up the stock's weekly 7/12 13-strike put for a volume-weighted average price (VWAP) of $0.07. The vast majority of the 20,416 contracts traded did so on the ask side, implied volatility jumped 9.8 percentage points, and open interest soared overnight, confirming the initiation of new bearish positions. In order for these out-of-the-money puts to be profitable, BAC must land below $12.93 (strike less VWAP) by Friday's close. This breakeven mark represents expected downside of 2.9% from the equity's current perch at $13.31.
The options market isn't too confident Bank of America will fall south of $13 by week's end. Thanks to today's modest move higher, delta for the put has moved to negative 0.20 from yesterday's closing measure of negative 0.25. Simply stated, there's a slim 1-in-5 chance the option will finish in the money ahead of expiration. Should BAC fail to breach the $13 mark, the most the traders stand to lose is the initial cash outlay.
As mentioned, Bank of America Corp (NYSE:BAC) has had a strong technical showing over the past 52 weeks, with the shares up more than 76%. However, the skepticism levied toward outperforming BAC hasn't restricted itself to the options pits. In fact, 67% of covering analysts maintain a "hold" or worse suggestion toward the stock, and the consensus 12-month price target of $13.54 sits just 1.7% above present levels. In other words, the door is wide open for a round of upgrades and/or price-target hikes, which could help BAC in its trek higher. Just this morning, FBR Capital Markets raised its price-target on the banking concern to $13.50 from $12.