Bank of America, Citigroup Calls Hot Ahead of Fed Meeting

Call buyers continue to target bank stocks Bank of America Corp (BAC) and Citigroup Inc (C)

Mar 13, 2017 at 11:45 AM
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The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Stocks highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. Two names of notable interest are bank stocks Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C). Here's a quick look at how options traders have been approaching BAC and C shares.

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Call Buyers Bet Bank of America Stock Can Keep Rallying

While BAC shares have been on an uptrend since last June's Brexit vote, the election of President Donald Trump kicked the rally into high gear, helping the stock widen its year-over-year lead to 84%. At $25.31, the stock is just shy of its March 2 eight-year high at $25.80, with the rising 10-day moving average boosting the financial stock even higher on anticipation of an rate hike at this week's Fed meeting. Against this backdrop, sentiment toward the stock is bullish across the board.

In the options pits particularly, BAC calls have been bought at near-extreme rates for months. In fact, the equity's 10-week call/put volume ratio of 4.07 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks just 2 percentage points from an annual bullish high. Over the past 10 sessions, speculators have targeted the May 25 call and March 26 call, with more than 110,000 contracts collectively added. The major options exchanges confirm a huge portion of the action has been of the buy-to-open variety, meaning call buyers are betting on BAC shares extending their gains in the near term.

It's certainly an attractive time to purchase near-term options, too. Bank of America Corp's Schaeffer's Volatility Index (SVI) of 24% is seated in the low 13th percentile of its 12-month range, pointing to muted volatility expectations being priced in at the moment. At the same time, the stock boasts a Schaeffer's Volatility Scorecard (SVS) of 94, indicating the options market has notably underpriced BAC's ability to make outsized moves over the last year.

Citigroup Options Traders Set a Short-Term Ceiling

At $61.68, C is also seated below its eight-year high of $62.53, which the stock tagged last Wednesday. Longer term, the stock has added 43% over the past 12 months. Analysts are generally upbeat -- 11 out of 17 firms rating the shares a "strong buy," while only one recommends selling the stock -- but short interest climbed by 27% during the two most recent reporting periods. A continued rise in short interest could put some pressure on C.

Meanwhile, in the options pits, C has seen calls bought to open over puts at a near-annual-high clip in recent months, with the stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 2.62 docked higher than 99% of all readings from the past year. But that doesn't mean everyone is bullish. Over the last 10 sessions, the April 65 call saw the largest rise in open interest, with 14,042 contracts added. Many of these out-of-the-money positions were sold to open, according to the major exchanges. These call writers are betting the overhead $65 level will serve as a ceiling for the shares through the back-month expiration, at the close on Friday, April 21.

However, now appears to be a prime time to buy premium on Citigroup Inc's short-term options, versus sell it. The equity's SVI of 21% ranks lower than 89% of the past year's comparable readings, meaning premium is well-priced, from a volatility standpoint. Plus, its SVS of 87 suggests C has outperformed the volatility expectations that have been priced in over the past 12 months.

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