Name That Trade – $BAC: Bank Shot

by Dan July 14, 2015 2:57 pm • Commentary

Event: BAC reports Q2 results prior to the open tomorrow, the options market is implying about a 2.75% one day move, which is a tad light of its 4 qtr avg move of 3.25%  

Price Action / Technicals:  BAC is down 4.4% on the year, with the closing tick on Dec 31st 2014 representing the 52 week high.

BAC has traded in a 20% range between $15 on the downside and $18 on the upside for the better part of the last two years, now trading above the mid point:

[caption id="attachment_55327" align="aligncenter" width="600"]BAC 2yr chart from Bloomberg BAC 2yr chart from Bloomberg[/caption]

On a longer term basis, $20 is massive long term resistance, a level the stock has not traded above since Nov 2008:

[caption id="attachment_55328" align="aligncenter" width="600"]BAC 10 year chart from Bloomberg BAC 10 year chart from Bloomberg[/caption]

My View:  In both volatility and dollar terms options prices seem fair, and possibly cheap depending upon your directional inclination.  While most options traders I speak to think that bank vol in general is a sale, I guess when it comes to BAC, which has been a laggard both this year and on a long term basis I would say the stock has the potential to play catch up in a big way if investors ever had a reason to finally buy it.  If I were to express this view with options I would want to do so in a way that would not cost me much premium.

Here is the trade I would consider to express a bullish view:

Hypothetical Trade: BAC ($17.10) Buy Oct 16 / 18 Risk Reversal for 2 cents

-Sell to open 1 Oct 16 put at .35

-Buy to open 1 Oct 18 call for .37

Break-Evens on Oct Expiration:

Profits: above 18.02

Losses: below 16

Rationale:  I think there is a distinct possibility that BAC remains range-bound, which would be very bad proposition for long premium directional players.  This trade structure neutralizes the risk of decay while offering a leverage to the upside, with worst case scenario being put the stock down about 6.5%.  If I were to express this view I would look to Oct as it will catch the Sept Fed meeting and the company’s Q3 earnings.