Bank of America (BAC) option trading strategies for bulls and bears

Bank of America (BAC) Brokerage firm Susquehanna issued a slew of new ratings in the financial sector on Tuesday, with “positive/buy” ratings for some and “neutral” ratings for others. Bank of America BAC earned a “positive” rating and moved higher on the day (the broad-market rally didn’t hurt matters). The brokerage said issues within the large-cap banking sector are trading at below-average multiple. What’s more, the covering analyst believes the impact of FinReg out of Washington has already been priced into the shares. In other words, it could be a sell the rumor, buy the news situation as investors return to the sector.

Traders who might follow Susquehanna’s thesis could employ a long call as a substitute for buying the shares outright. For Bank of America skeptics, there are a variety of option strategies that may have lower risk than shorting the stock. The examples below are hypothetical and should not be interpreted as buy/sell/hold recommendations. Always consider your risk/reward parameters before placing any new trades. Prices are given as of Tuesday’s close, when BAC was trading at $15.67, up $0.46 (3.0%) on the day.

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Bullish Option Strategy: Long Call

Investors wanting a different take on buying the stock outright could consider the November 14 calls for $2.48. The maximum loss for this option is $2.48; maximum gains are potentially unlimited. At expiration, breakeven for this call option is $16.48, or the strike price plus the premium paid.

This call currently has a delta of 72 cents, which means that in the short term, it should move 72 cents higher for every one-dollar advance in the underlying stock (assuming all other factors are equal). For example, if BAC moved up $1 to $16.67, the stock investor earns 6.4%. The option trader, however, would see his call rise from $2.48 to $3.20, a percentage gain of 29%. This concept of leverage is one reason why many stock investors turn to options. Of course, a $1 drop in BAC would mean a likely 72-cent decline in the option, so leverage can work against option traders as well.

Bank of America bullish options strategy

Bearish Option Strategy: Put Ratio Frontspread

Investors who expect BAC to come under moderate pressure in the short term could consider a put ratio spread, selling two out-of-the-money puts and buying one near- the-money put:

-Buy one August 15 put

-Sell two August 13 puts

-Total cost of 20 cents per spread

To the upside, the maximum risk is capped at 20 cents per spread if BAC is trading above 15. To the downside, risk is capped at $11.20 by fact that the stock cannot trade below zero.

Maximum potential profit, if the stock is trading right at the 13 strike at expiration, is limited to $1.80, or the difference in strike prices minus the premium paid. The breakevens for this strategy are $11.20 to the downside (the short strike minus the maximum profit potential) and $14.80 to the upside (the long strike minus the credit paid). If BAC is trading higher than $11.20 but lower than $14.80 at expiration, this spread turns a profit.

Bank of America bearish options strategy