Bank of America Calls Soar as Shares Battle for Double Digits

by Joseph Hargett | March 19, 2012 1:46 pm

Financial giant and Dow Jones Industrial Average (DJIA) member Bank of America Corp. (NYSE:BAC[1]) is a hot topic on Wall Street today. Not only is the blue-chip banker leading the Dow higher, rising nearly 2% at last check, but BAC options are the most sought-after so far this afternoon. Specifically, volume has swollen to more than 805,000 for BAC, beating out both Apple Inc. (NASDAQ:AAPL[2]) and Citigroup Inc. (NYSE:C[3]) for the top spot in the options pits.

Taking a closer look reveals a significantly bullish bias to today’s activity. Roughly 600,000 calls have traded on BAC, compared to about 208,000 puts, resulting in a single-session put/call volume ratio of 0.34. In other words, call volume has nearly tripled put volume so far on the session. What’s more, with BAC attempting to battle its way out of the single-digits today, look for these totals to potentially rise significantly before the close.

The most-active BAC contract today is the April 10-strike call, where some 95,000 contracts have crossed the tape on open interest of 160,288 contracts. Arriving at a close second is the March 10-strike weekly option, with about 85,000 calls trading on open interest of 76,422 contracts. Should volume continue to rise at the March 10, it could be an indication of new positions being opened at the strike with less than a week before expiration.

Speaking of new open interest, both the March and April 11 strikes appear to be hotbeds of newly opened positions. Specifically, a hefty 35,000 contracts have traded on the March 11 call, which sports only about 6,261 contracts, while the April 11 strike has attracted 67,000 calls on open interest of 24,412 contracts.

At last check, the March 11 call had risen one cent to trade at five cents, or $5.00 per contract. Meanwhile, the April 11 call was last asked at 21 cents, or $21 per contract, up five cents on the day.

Traders clearly appear to be speculating on BAC’s success at overtaking the round-number $10 level. One of two possible strategies being employed in the data above might be a bull call spread. For instance, a trader might simultaneously purchase a March 10 call and sell a March 11 call in order to limit losses while still betting on a breakout above $10 for BAC. This particular trade was last asked at 25 cents per pair of contract, placing the maximum profit at 75 cents, should BAC rally through $11 at expiration. (The maximum loss, meanwhile, is 100% of the premium spent).

The second such strategy is more for bearish options traders. A bear call spread would involve simultaneously selling a March 10 call and buying a March 11 call. In this case, the trader is betting that BAC will not finish above $10 when March options expire, while limiting his/her losses by purchasing the March 11 call. This particular trade was last bid at 23 cents per pair of contracts, with a maximum potential loss of 77 cents should BAC close at or below $10 at expiration. The maximum profit is the 23-cent credit collected and is achieved if BAC is still trading south of $10 when the options expire.

Technically speaking, the $10 area has provided both support and resistance for the stock in the past, though a path forward is currently clouded by the stock’s technical backdrop. On the plus side, BAC’s 50-day and 200-day moving averages recently completed a bullish cross – also known as a “Golden Cross.”   This technical formation is often a harbinger of additional gains for the security.

That said, BAC may be running thin in terms of additional buyers. Specifically, its 14-day RSI (currently near 80) is hovering more than 10 points above what is typically considered overbought territory. While an overbought condition does not preclude additional gains (just look at AAPL’s continued advance), it does raise some concerns for BAC bulls.

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As of this writing, Joseph Hargett does not own any shares mentioned here. 

  1. BAC:
  2. AAPL:
  3. C:

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