With the prospect of four potential interest-rate hikes from the Federal Reserve, Bank of America Corp (BAC) investors rolled into 2016 with high hopes. However, a weak global economy and shifts toward negative interest rates at many foreign central banks have put the Fed’s rate-hike plans, and the prospects for a solid 2016 for BAC stock, on hold.
Despite this clear threat to projections for Bank of America’s bottom line, investor sentiment remains extremely bullish on BAC stock — a factor that could open up opportunities for savvy options traders ahead of Thursday’s trip to the earnings confessional.
Taking a look at the numbers, Wall Street is expecting Bank of America earnings to fall 22% to 21 cents per share. Revenue is likewise expected to fall, slipping 5.2% to $20.3 billion.
That said, many analysts have high hopes for an earnings beat, with EarningsWhisper.com reporting a whisper number of 26 cents per share for BAC stock.
This bullish outlook has spread throughout the brokerage community. Specifically, Thomson/First Call data reveals that BAC stock has attracted 26 buy ratings, compared to just five holds, and no sell ratings.
Furthermore, the 12-month price target of $17.41 represents a hefty premium of about 34.2% to Monday’s close. Should Bank of America’s results or guidance come in below expectations, it could spark a round of downgrades from this bullish bunch.
Elsewhere, options traders are also quite optimistic when it comes to BAC stock. Currently, the April/May put/call open interest ratio rests at a bullish reading of 0.65, with calls easily outnumbering puts among near-term options. This ratio rises slightly to 0.67 when we look at just the April series of options, but the bullish bias is still clear among speculative traders.
Click to Enlarge Overall, April 15 series implieds are pricing in a potential post-earnings move of about 3.85% for BAC stock. This places the upper bound at $13.46, while the lower bound lies at $12.48. Technically, a rally to $13.50 means little, as it leaves BAC stock below several layers of technical resistance. However, a dip to $12.48 would breach support at $12.50, leaving BAC stock vulnerable to additional losses over the intermediate term.
2 Trades for BAC Stock
Put Spread: BAC stock is really pushing at my contrarian instincts here, with poor price action and a wealth of bullish sentiment. Furthermore, with the Fed holding on rates, there is no telling when those expected investment gains to BofA’s bottom line will kick in … if ever. Even an in-line quarterly report with poor guidance should lead to a selloff for BAC stock, given how high expectations are over the long run.
As such traders looking to position themselves ahead of BofA’s report might want to consider entering an April 15 series $12.50/$13 bear put spread. At last check, this spread was offered at 19 cents, or $19 per pair of contracts. Breakeven lies at $12.81, while a maximum profit of 31 cents, or $31 per pair of contracts, is possible if BAC stock closes at or below $12.50 when April options expire at the end of the week.
Call Sell: If you’re not comfortable betting directly against BAC stock, you might consider a more neutral position by entering an April 15 series $14 strike call sell position. Such a trade is especially useful if you already own BAC stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $14.
At last check, this option was bid at three cents, or $3 per contract. A sold call allows you keep the premium as long as BAC stock closes below $14 at expiration. On the downside, if BAC rallies above $14 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
