Technically in vogue Anchor Bankers (XLF) Wells Fargo (WFC) and JPMorgan & Chase (JPM) are reporting this Friday, but its peer and the slightly less favored BofA (BAC) which is drawing the lion’s share of unusual option activity midway through Wednesday’s stab at bargain-hunting from market bulls.
With shares of BAC up 4.0%, volume has bust through 425,000 contracts compared to its 150SMA of 293,000. Most active by a wide margin are the Weeklys April 9 calls with more than 120,000 traded in volume narrowly topping its existing open interest of 94,000. Priced for $0.09 with shares at $8.85 and just two days until expiration, bulls purchasing the call will need about 3.60% of additional upside to realize a double and one that would likely be looking for help from Wells and JP on Friday.
Figure 1: BofA (BAC) Daily Chart
Looking to the charting tea leaves for help, our on again, off again technical assistant PS Elliott maintains a bearish daily and weekly view of BAC (not shown) with Wave 5 and Wave 4 tops in play. A less menacing stance provided in Figure 1 above shows BAC has found support from its 50SMA in trying to establish a fresh pivot low within its uptrend established off its December bottom. With shares holding above the 38% retracement and signaling a Golden Cross in mid-March, bulls have a couple other layers of confirmation too; albeit at much lower levels than Tuesday’s successful test.
Figure 2: BofA (BAC) IV / SV Chart
Beyond the well-traded Weeklys contract, activity is above average and both the April and May at-the-money 9 strike are seeing fairly heavy action. Traders are paying equal attention to BAC’s calls and puts with volume on either side of 30,000 and 16,000 for the latter contract’s calls and puts.
Premiums are by and large still fairly priced relative to underlying volatility. With implieds in the bottom quartile of their yearly range, the combination, along with earnings set for next Thursday morning is likely to see the April contract continuing to get bid up into the report as part of an earnings rush scenario, followed by an equally likely volatility crush.
Figure 3: BofA (BAC) 5x April 9 Straddle “Tweaked”
Shown above, is an illustrated long April 9 straddle priced for $0.67 on 10 spreads. The risk graph is a bit different than the more common expiration risk graph as it reflects two key contrasting variables for long straddle positions. By factoring in a positive, guesstimated 50% increase in implied volatility towards 90%, but also taking into account the passage of time into the earnings release and the position’s negative long theta; we’ve come up dollar risk of about $210 compared to its maximum exposure of $670.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.