Front-month implied volatilities are low on BAC stock
Bank of America Corp (NYSE:BAC) is trading down a modest 0.2% today at $31.90, despite sharp losses for fellow financial stock Wells Fargo (WFC). Plus, the shares are holding near their nine-year peak of $32.67 -- hit during last Friday's broad-market bloodbath -- and are up 37% on a year-over-year basis. And if history is any guide, BAC stock could be headed for even higher highs in the near term.
According to Schaeffer's Senior Quantitative Analyst Rocky White, BAC's Schaeffer's Volatility Index (SVI) of 24.3% is ranked above just 7.9% of comparable readings taken in the past year. Since 2008, there have been three other times when front-month implied volatilities on Bank of America have been this low while the shares have simultaneously been trading near 52-week highs -- a signal that has been followed by an average 5.73% gain one month later. Based on BAC's current perch, another move of this magnitude would put the security near $33.76 for the first time since October 2008.
Options traders have certainly been betting on more upside in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 4.28 calls for every put over the past 10 weeks. This ratio ranks in the 95th annual percentile, indicating this rate of call buying relative to put buying has been extreme.
However, it's worth noting that BAC stock has consistently rewarded premium buyers over the past year, per its elevated Schaeffer's Volatility Scorecard (SVS) reading of 89 (out of 100). In other words, the shares have tended to make oversized moves, compared to what the options market has priced in.
And while options traders are optimistic, there's still some skepticism priced into BAC shares -- which could translate into buying power down the road. Of the 19 analysts following Bank of America stock, eight still maintain a tepid "hold" recommendation, while the average 12-month price target of $34.03 stands at a slight 6.7% premium to current trading levels. This leaves the door open for upgrades and/or price-target hikes, which could help lift the equity.