Blue-chip banking giant Bank of America Corp (NYSE:BAC) leads the way for the financial sector heading into the next round of corporate earnings reports, and all eyes will be on BofA for clues on how the rest of the sector will perform.
Expectations are mixed for Bank of America, and while the company has put aside some of its legal woes, BofA still has its work cut out for it.
Diving into the numbers, Wall Street is expecting a profit of 29 cents per share from BofA, up sharply from a loss of 5 cents per share in the year-ago period. Year-over-year comparisons are not as cut-and-dry as they seem, however, as Bank of America’s losses last year were heavily influenced by a legal charge of $6 billion, or 40 cents per share.
Bank of America has managed to cut its legal expenses this year, but profitability in its trading unit were down last quarter, and many analysts expect this trend to carry over into the first quarter. Revenue could shed more light on the company’s quarterly performance, with the consensus expecting sales to fall 5.5% year-over-year to $21.5 billion.
While BAC stock has received several downgrades during the past several months, the overall stance within the brokerage community is a positive one. According to data from Thomson/First Call, 18 of the 29 analysts following BAC stock rate it a “buy” or better. That said, the 12-month consensus price target is a bit underwhelming at $18 per share — a premium of only 14.5% to Friday’s close.
Shifting our focus to the options pits, followers of my Today’s Vital Data column know that Bank of America is a perennial favorite for speculative options traders, with the stock consistently appearing near the top of daily Top 10 options activity. Despite the wealth of options volume on BAC stock, the equity’s April/May put/call open interest ratio hasn’t strayed far from a reading of 0.62 since March options expiration.
Taking a closer look reveals that peak April open interest totals 129,847 contracts at the just-overhead $16 strike call. Following at a distance second is the out-of-the-money Apr $15 put, where 95,211 contracts currently reside.
Click to Enlarge Overall, April option implieds are pricing in a potential post-earnings move of about 3.4% for Bank of America. This places the upper bound at $16.55, while the lower bound rests at $15.45. A post-earnings rally could be huge for BAC from a technical perspective, as it would place the stock north of its 50- and 200-day moving averages for the first time since the end of 2014. A decline, meanwhile, would push Bank of America back below potential resistance at its 10- and 20-day trendlines.
2 Trades for Bank of America Stock
Call Spread: BAC stock is currently in the midst of a rebound off its near-term lows, and while the shares are facing technical resistance, BAC appears to have some momentum. Combine this with lingering doubt within the stock’s sentiment backdrop, and a positive report could go a long way toward providing lift for the shares.
As such, those traders looking to take a chance on a bullish play on Bank of America ahead of earnings might want to consider a May $16/$17 bull call spread. At last check, this spread was offered at 24 cents, or $24 per pair of contracts. Breakeven lies at $16.24, while a maximum profit of 76 cents, or $76 per pair of contracts, is possible if BAC closes at or above $17 when May options expire.
Put Spread: On the other hand, BofA is still dealing with declining trading revenue and is facing currency headwinds in addition to the potential for rising interest rates and additional legal fees. As such, traders wanting to side with the bears should consider a May $15/$16 bear put spread.
At last check, this spread was offered at 39 cents, or $39 per pair of contracts. Breakeven lies at $15.61, while a maximum profit of 61 cents, or $61 per pair of contracts, is possible if Bank of America stock closes at or below $15 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
