Option Trade
Bank of America Corp (NYSE:BAC) Calls 
Monday, 01 February, 2016

**OPTION TRADE: Buy the BAC May 2016 15.000 call (BAC160520C00015000) at approximately $0.50. Place a pre-determined sell at $1.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.20.

by Ian Harvey

February 01, 2016

Stocks had a strong open on Friday after Japan cut its interest rates into negative territory to follow Europe on easing trends and quantitative easing. This followed on from strong gains in U.S. markets on Thursday.

Bank of America Corp (NYSE: BAC) also gained greatly from this stock market movement, but more so due to analysts at CSLA raising the stock to Outperform from Sell with a $16 price target (versus a $13.53 prior close). Bank of America’s consensus analyst target is now $18.40 and its 52-week range is $12.94 to $18.48.

It is important to consider that over the past one week, Bank of America has gained momentum, recovering towards the neutral territory.

CLSA is "positive on large US banks" in general, arguing their stocks are priced at "recession prices without a recession." As for Bank of America in particular, the stock sports "relatively clean" book value and a cheap valuation.

Currently, Bank of America sells for a price-to-book value of just 0.6, versus CLSA's longtime favorite, JPMorgan, which costs more than half-again Bank of America's price -- 0.95 times book.

With better-than-expected earnings results, Bank of America stands out in the industry. The bank has been able to outperform its peers with effective cost cutting measures that aided the bank to improve overall earnings and post record annual profits.

Bank of America reported fourth quarter with the earnings per share (EPS) of $0.34 and revenue of $19.7 billion. As estimated by the Bank of America’s management, an increase of 100 basis points in interest rates will lead to improve net interest income to nearly $4.3 billion. The bank has great asset sensitivity and excess deposits, which are deemed to be invested in short-term yields when rates are low.

As for the future outlook, analysts providing coverage on the bank remain bullish and expect improved earnings. According to Bloomberg, analysts project revenue of $21.795 billion for 1QFY16 with YoY growth of 2.9%, and EPS of $0.31 with YoY growth of 5.1%.

Additionally, it is worth noting that the bank holds nearly 2% of total loan in energy sector. With the plunge in oil prices, investors remain concerned for banks that have issued loan to the energy sector. While collaterals backing these loans are shedding value, Bank of America has been able to mitigate the risk related to its exposure by creating provision of loan loss reserves. Moreover, in order to protect itself from trading risks, it has repurchased shares and increased dividends. Many analysts expect this pattern to continue, but in a conservative way.

Bank of America is all set to penetrate into the market with card-less ATM initiative, as these transactions will be made through smartphones. The pursuit of this initiative is expected to provide the bank with improved security and efficient transaction. Bank of America’s decision, to reach out to its customers through the initiative of card-less ATM, indicates its inclination to grab new opportunities and redefine its business strategy.

More importantly, Bank of America’s management has been able to clear the 2015 Comprehensive Capital Analysis (CCAR) test conducted by Federal Reserve.

Brian Moynihan took over the charge of the company, as CEO, when it was hit by recession of 2007 and has been successful in managing the bank recover and has made it able to perform better and grow profitable.

Additionally, the bank has been striving to combat the headwinds in the industry and has adopted alternative measures to boost profits. It has undertaken cost-cutting measures; reduction in headcount has been the prominent one.

Harvey’s Options Volatility Indicator

Conclusion

Even though Bank of America gained 4.43% on Friday, there is still a great deal of upside potential available.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the BAC May 2016 15.000 call (BAC160520C00015000) at approximately $0.50. Place a pre-determined sell at $1.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.20.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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