Options Players Target 2 Booming Bank Stocks

Bank of America Corp (BAC) and JPMorgan Chase & Co. (JPM) are both benefiting from bullish brokerage attention

Nov 30, 2016 at 12:16 PM
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Bank stocks are on the rise today, with upbeat economic data bolstering the case for a December interest rate hike. Plus, analysts at Deutsche Bank weighed in overnight with a round of price-target hikes across the sector, saying, "We sense that leverage to higher rates is mostly reflected in stock prices, but that higher lending and fee volumes from a stronger economy may not be." Among the specific financial stocks bounding higher are Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM) -- both of which are also seeing some notable action in the options pits.

BAC is up 3.8% at $20.99 -- widening its 2016 lead to nearly 25% -- and earlier notching a fresh eight-year high of $21, after Deutsche Bank increased its price target on the stock to $23 from $17.50. The shares could stand to benefit from more bullish notes, too, as the average 12-month price target of $19.88 sits at a discount to the stock's current levels -- suggesting price-target hikes may be in order, following the equity's huge post-election rally.

Meanwhile, bearish sentiment seems to be building among short sellers, with short interest climbing by 34.3% during the two most recent reporting periods. While just 1.4% of BAC's total float is sold short, the nearly 149 million shares dedicated to these bearish positions is the most since early 2014.

That said, some of these bears may be buying calls to hedge against another upward move for BAC. After all, the stock has seen four calls purchased for each put over the past 20 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX).

Whether it's puts or calls, now looks like a good time to scoop up premium on BAC's short-term options, with low volatility expectations being priced in. The stock's Schaeffer's Volatility Index (SVI) of 26% rests in the low 14th percentile of its annual range. What's more, its Schaeffer's Volatility Scorecard (SVS) of 92 indicates the options market has tended to underprice BAC's ability to make outsized moves over the last year.

Bank of America Corp (NYSE:BAC) options are crossing the tape at twice the typical intraday pace today, with volume in the 99th annual percentile. As usual, calls more than double puts. Digging deeper, clear-cut buy-to-open activity is detected at the weekly 12/9 22-strike call, hinting at expectations for higher highs through next Friday's close, when the series expires.

Switching gears, JPM has added 1.5% at $80.10, and is within a chip-shot of a new record high. The stock has added 21.3% year-to-date, and today saw its price target raised to $90 from $73 at Deutsche Bank, representing never-before-seen territory. Like its peer above, JPM could stand to benefit from more bullish attention on Wall Street, as its consensus 12-month price target is seated underfoot at $77.79, and 12 out of 22 analysts rate the shares a "hold" or a "strong sell." Short interest has also been popping on JPM, up 38% over the past two reporting periods to a one-year high of 40.9 million shares.

This rise in short interest could explain some of the preference for long calls among JPM options traders -- as short sellers could be hedging. The stock's 10-day call/put volume ratio of 1.52 on the ISE, CBOE, and PHLX ranks higher than roughly four-fifths of the past year's readings. It's not a bad time to buy the stock's near-term options, either. JPM's SVI of 20% resides in the low 19th percentile of its 12-month range.

Looking at today's action in the options arena, JPM puts and calls are changing hands at around their usual rate. It looks like speculators are eyeing the round $80 level in particular, with that strike accounting for four of the stock's 10 most action options. Leading the way is the weekly 12/2 80-strike call, where it's possible some traders are purchasing new positions. If so, the call buyers are betting on JPMorgan Chase & Co. (NYSE:JPM) to extend its rally above the $80 through week's end.

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