Tapping BofA’s Upside Potential

by John Jagerson and Wade Hansen | October 16, 2012 7:30 am

Well, we’re in the midst of earnings season, and so far we haven’t seen any announcements that have been too disruptive. We’re seeing a continuation of the trend that started last quarter of lower top-line revenues accompanied by better-than-expected bottom-line earnings, but Wall Street hasn’t made a bearish reaction to that yet.

Wells Fargo (NYSE:WFC[1]) and JPMorgan (NYSE:JPM[2]) were two banks that reported positive earnings last week, and we’re looking to take advantage of it with a trade in Bank of America (NYSE:BAC[3]). BAC will be a beneficiary of the increased confidence in banks, and since the company releases earnings on Oct. 17[4], there’s potential for additional upside.

Options Recommendation: Buy to open the BAC Nov 9 Calls for 60 cents or less.

We traded BAC recently, and our analysis at the time was that it seemed unlikely for the stock to break $10 per share on a rally. That still seems the most likely upper target, but on a low-price stock like this, that’s 7% from where prices are now, leaving plenty of upside for a potential trade.

The 9 calls are in the money, and we typically don’t trade in-the-money options. However, the low price of BAC and the fact that its options are in dollar increments makes the in-the-money option much more attractive than the $10 out-of-the-money strike. In both cases, there’s extrinsic (time) value, but we expect the 9 calls to benefit more on a smaller rally because they have some intrinsic value already.

John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader[5], a trading service designed to help you make options profits by trading the news.

  1. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  3. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  4. releases earnings on Oct. 17: http://investor.bankofamerica.com/phoenix.zhtml?p=irol-eventDetails&c=71595&eventID=4828814#fbid=txYnAoSd82F
  5. SlingShot Trader: http://slingshot-trader.investorplace.com/

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