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4 Options Plays on Big Bank Stocks

BofA, Citigroup are setting up beautifully from a technical perspective


Big bank stocks have enjoyed a lift over the last few trading sessions, helping the Financial SPDR (XLF) recover from its early August selloff to push to new all-time highs Monday.

There are a few catalysts in play. For one, with the geopolitical tensions diminishing in Iraq and Ukraine, and with central banks in no hurry to pull back on economic stimulus, the overall market is enjoying a surge of buying interest.

But there sector-specific factors in play as well. Last week, Bank of America (BAC) reached a near $17 billion agreement with the Department of Justice to settle charges of misleading investors during the housing boom — essentially resolving nearly all the legacy legal overhang related to the acquisition of Countrywide and Merrill Lynch.

I think the run higher will have legs not only to the end of the housing-related overhang but also because of the prospect for better net interest margins (difference between loan and deposit rates) as the Federal Reserve prepares to wind down its QE3 bond purchase program.

This, along with the strength of the economy, should cause long-term interest rates to halt their recent decline and rebound higher widening bank interest margins.

For the conservative, simply buying the XLF or the BAC common shares would be the way to go. For the more aggressive, here are four options plays on bank stocks that I’ve recently recommended to my Edge Pro clients:

Big Bank Stocks – Citigroup (C)

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Citigroup (C) has pushed aggressively over resistance near $51 that has constrained the stock since January. Volume is good. And we’re now looking at the first upward cross of the 20-day moving average over the 50-day since September 2012.

In other words, this is the best uptrend setup in Citigroup in two years.

In response, I’ve recommended two separate call option plays. The Sep $50.50 calls (which can be bought at $1.56 currently) are up nearly 70% since clients added them on Aug. 21. And the Oct $50 calls ($2.46) are up nearly 40% over this time.

I’m looking, at the very least, for a return to the January high near $55 in the weeks to come. At current prices, these two contracts should rise, on intrinsic value alone, to gains of 290% and 203%, respectively, if that happens. If you sell before expiration, obviously results will be padded by remaining time value as well.

Big Bank Stocks – Bank of America (BAC)

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Bank of America, in a pattern similar to what’s going on with Citigroup, is moving up and over multimonth resistance after falling below its 200-day moving average back in April. Shares have another 10%+ of upside from here to return to their March highs.

I’ve recommended the Sep $16 calls (45 cents currently), which are up more than 63% since Aug. 21, as well as the Oct $16 calls (64 cents), which are up nearly 40%.

I’m looking for a push to $17 a share in BAC stock, meaning these two contracts could climb an additional 217% and 156% on intrinsic value respectively based on current options prices.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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