There may be trouble brewing for Bank of America Corp (NYSE:BAC). In an interview with Bloomberg yesterday, President Donald Trump touched on a campaign promise to break up so-called “universal” banks — i.e., those banks with both investment and commercial banking operations, including Bank of America, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C). And yet, BAC stock rallied on the news.
“I’m looking at that right now,” Trump told Bloomberg. “There’s some people that want to go back to the old system, right? So we’re going to look at that.” That old system is the 1930s era Glass-Steagall Act that drew a hard line between investment and commercial banking operations. The act was repealed in the 1990s.
However, despite Trump’s nod to his campaign promise, BAC stock actually rallied more than 1% on Monday. In fact, sentiment on Wall Street is that reinstating Glass-Steagall goes against Trump’s “America First” economic plans, and therefore is unlikely to come to fruition.
Once again, it’s all about expectations.
Sentiment and Outlook on Bank of America
I’ll give Wall Street investors one thing — an exact replacement of Glass-Steagall isn’t very likely. However, some lesser form of the bill could very well make its way into Congress for debate, if not onto Trump’s desk in the Oval Office, thus raising pressure on banking stocks and BofA in particular.
Judging from BAC stock’s sentiment backdrop, any form of this bull making a serious push on Capitol Hill could be a blind side for investors — as yesterday’s rally following Trump’s interview might suggest.
For instance, Thomson/First Call reports that 22 of the 31 analysts following BofA rate the shares a “buy” or better, with no “sell” ratings to be found. There is also no short interest to speak of — short sellers simply do not have Bank of America on their radar.
Even options traders are overwhelmingly bullish. Currently, the May/June put/call open interest ratio for BAC stock rests at 0.56, and drops further to just 0.53 for the June series alone. In other words, speculative traders currently hold nearly twice as many calls as puts over the next two months.
From a contrarian perspective, optimism on a strong performing stock is to be expected. Excessive optimism, however, can be a sign of a reversal in the shares.
I believe Bank of America’s rally in the face of the president’s comments on breaking up big banks could very well be a sign of excessive optimism.
In this situation, all it will take is a nudge in the wrong direction to push BAC stockholders into profit taking mode, creating downside risk for the stock.
Click to Enlarge Returning to BofA options, June implieds are pricing in a potential move of about 4.3% heading into expiration. As a result, the upper bound for the expected move lies at $24.50, while the lower bound rests at $22.50.
2 Trades for BAC Stock
Put Spread: Traders looking for optimism on Bank of America to finally unwind and send the shares lower might want to consider the June $22/$23 bear put spread.
At last check, this spread was offered at 22 cents, or $22 per pair of contracts. Breakeven lies at $22.78, while a maximum profit of 78 cents, or $78 per pair of contracts, is possible if BAC stock closes at or below $22 when June options expire.
Put Sell: If betting directly against BofA feels a bit premature to your risk profile, then a more neutral-to-bearish stance may be more appealing. Along those lines, a June $21 put sell should do well in taking advantage of the stock’s recent stagnation.
At last check, this put was bid at 12 cents, or $12 per contract. The upside, as usual, is that you keep the premium as long as BAC stock closes above $21 when these options expire. The downside is that should Bank of America trade below $21 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $21 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.