Option Trade 
Bank of America Corp (NYSE:BAC) Calls 
Wednesday, August 19, 2015

**OPTION TRADE: Buy the BAC Sep 2015 18.000 call (BAC150918C00018000) at approximately $0.26. Do not place a protective stop loss, but a pre-determined sell at $0.60.

by Ian Harvey

August 19, 2015


Financial stocks have been a mixed bag, but there are some opportunities are still to be found. One of these is Bank of America Corp (NYSE: BAC), and is presenting a quite attractive options play.

“Golden crosses” formed on Bank of America’s chart in mid-June and late July, with the 50-day moving average and 100-day moving average crossing above the 200-day moving average.

Bank of America is a complex financial institution, beleaguered by all sorts of past mismanagement, misdeeds, regulatory mandates, and enormous fines/penalties. However, it seems to be turning the corner, as noticed in the last conference call – and has two important factors working in its favor which has helped Bank of America to generate significantly improved earnings. These are:-

1. 2015 Q2 operating earnings per share was $0.45, or a $0.09 beat on a $0.36 basis. This was the highest EPS recorded in over 3 years.

The 2015 Q2 net interest income, or the difference between interest earned and interest paid, jumped to $10.7 billion. Much of the increase was due to a favorable $669 million market-related adjustment applied to the bank's debt securities portfolio. Bank of America is well-levered to higher rates, more so than many other banks. Indeed, about 80% of the debt portfolio is tied to floating rates.

2. And non-interest expense, which has been a line item that has dogged Bank of America for a long, long time; in no small measure due to a constant barrage of assessed fines and penalties. However, things looked different in the last earnings report. Non-interest expense fell to $13.8 billion after averaging $18.1 billion over the previous 5 quarters. The bank recorded the lowest quarterly total since 2008 Q4. Indeed, much of the reduction was due to reduced legal expenses, though a considerable portion of the savings was a result of bank expense efficiencies.


• Bank of America has a debt portfolio well-levered to higher rates via a portfolio emphasizing floating rate debt. Management reported this leverage came down somewhat in the most recent quarter. Don't worry. It's still strong.

• Based upon any reasonable interpretation of Federal Reserve communications, the matter of near-term higher rates is a given. While the Fed may only set short rates, there is high probability a tick in short rates will lead to a related move in long rates; and higher net interest margins.

• Therefore, BoA investors may expect net interest income to trend upward in coming quarters.

• Bank of America just recorded its lowest quarterly non-interest expenses since the Great Recession. Much of the major legal fines, penalties, and settlements are behind it.

• Company management indicated to Street analysts the current quarter non-interest expense figure represented a reasonable run-rate.


All three credit rating agencies have upgraded Bank of America’s debt rating since May 19th. The moves signal a dramatic change in tone for the ratings agencies and, at least in my opinion, provide further proof that the $2.2 trillion bank may be on the verge of a sharp recovery that isn't reflected in its current share price.

This is an important issue for Bank of America because it pays higher interest rates to borrow money than many of its competitors do, particularly on a long-term basis.

To put this in perspective, had Bank of America paid the same interest rate as Wells Fargo over the past 12 months, it would have saved approximately $2 billion in interest expense. That would have boosted Bank of America's pre-tax earnings by an average of 23.6% in each of the past four quarters.

The agencies observed that Bank of America's business franchise is "among the best in the U.S., with significant scale and leading market positions nationwide, including in its retail and commercial banking, capital markets, and wealth management businesses." And it concluded the assessment by noting that the bank's "balance sheet remains strong, with ample capital and liquidity." Given this, it was peculiar that the ratings upgrades haven't made the news.

Analysts Opinions

Bank of America ‘s stock had its “buy” rating reiterated by research analysts at Deutsche Bank in a research report issued to clients and investors last Wednesday. They currently have a $20.00 target price on the financial services provider’s stock.

The company has also been the subject of a number of other research reports:-

• Vetr downgraded Bank of America from a “hold” rating to a “sell” rating and set an $18.43 price objective for the company. in a research report on Wednesday, June 10th.

• Jefferies Group reissued a “buy” rating and set an $18.00 target price (down from $19.00) on shares of Bank of America in a research note on Thursday, April 16th.

• Nomura upped their price target on Bank of America from $17.00 to $18.00 in a research note on Tuesday, July 21st.

• Sanford C. Bernstein reissued a “market perform” rating and issued an $18.00 target price (up from $17.00) on shares of Bank of America in a research note on Saturday, May 23rd.

• Finally, Oppenheimer lowered their price target on Bank of America from $22.00 to $21.00 and set an “outperform” rating on the stock in a report on Thursday, April 16th.

Two analysts have rated the stock with a sell rating, seven have issued a hold rating, thirteen have issued a buy rating and one has issued a strong buy rating to the company’s stock. The company presently has a consensus rating of “Buy” and an average target price of $20.00.

Harvey’s Options Volatility Indicator


A bank looking at likely higher net interest income, while concurrently experiencing major non-interest expense reduction is certainly providing fuel for this option trade.

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

**OPTION TRADE: Buy the BAC Sep 2015 18.000 call (BAC150918C00018000) at approximately $0.26. Do not place a protective stop loss, but a pre-determined sell at $0.60.

”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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