BAC: Not Banking On This

Morning Note Oct 3rd

October 3, 2011


US equity futures are off the worst levels of the morning following Asia and Europe lower as continuing concerns over the banking sector and slowing global growth are once again highlighted after Greece admitted over the weekend it would miss it's Fiscal targets. With no resolution in sight to the EU debt crisis, anxiety continues to weigh on markets.

Sanford Bernstein Lowers Bank Targets

BofA Sued Over Alleged Failure To Disclose Potential $10 Billion AIG Loss

BAC, C, & MS Lead Banking Stocks Lower

Bloomberg TV's Cali Carlin on Bank of America demolishing foreclosed homes

Banks Relatively Strong, V Reports Earnings Today After Bell

T3 "Banks Show Relative Strength"

BofA Needs to Build $50 Billion Cushion

This article originally appeared here.

"Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds.

Banking Stocks Get Attention Prior To JPM & C Earnings

Scott Redler of T3 Live shares his view on banks prior to earnings. 

BofA to take $13 billion more in charges: Bernstein

this originally appeard here.  Maybe this is why all those puts were bot yesterday... 

Bank of America will take another $13 billion in charges related to pending settlement with private label mortgage-backed securities investors, Sanford C Bernstein said.

BAC trade ideas

On a follow up from yesterday.  We asked readers to give us their thesis on BAC and we would suggest a couple possibilities based off of order flow.  A lot of the ideas were pretty basic or didn't have a volatility or time component so we might follow up on those at a latter date.

Matt from Chicago emailed:  "I want to be long BAC around $10 but if it has bottomed already I don't want to miss out.  I think the stock goes back and fills the open gap at 12.8 and maybe higher by the end of this year or early next year.  I think volatility goes down." 

Trade of the Day: Bank of America August $13/$10 bull risk reversal

The Trade:
A trader put on a bull risk reversal using the August $13/$10 options for a 1 cent credit, 4,700x.

Bank of America Billions in Losses at Stake on Moynihan Outlook

read the full article here: Bank of America Billions in Losses at Stake on Moynihan Outlook - Bloomberg

Follow Up: BAC - Right Now (Bank of America Inc.)

Wanted to take a quick second to do something we don't usually do, which is review a previous post and connect some dots. Today BAC made the move many were anticipating - a break above the declining tops line and a run towards the gap. I'm disappointed to say that despite having stalked this trade, I did not cash in nearly as much as I would have liked. The move off the open was sharp and quick and I would have preferred to buy the early pull back. One axiom we hear a lot is the market moves in the direction that hurts the most people. Quicker moves like this can often be indicative of shorts getting squeezed. The rapid buying and the lack of sellers causes a bit of a panic and that looks like what might have happened today.

Here's a look at how it went down.

I'm not sure BAC is done basing, but it will be very telling of short interest if it gets squeezed into the gap tomorrow. If it does get into the gap, I will most likely be looking to fade the gap fill for a quick trade. Good luck, and remember to stay light and tight.

A Quick Look at the Charts : BAC (Bank of America) & C (Citigroup Inc.)

Experimenting with posting a few 60 min charts here. Let us know how you do/do not like it...

A quick look at the charts - Bank Of America and Citigroup Inc.

Trade of the Day: Short 5,000 Citigroup Inc Jan 13 5.5 straddles

Today one strategist sold 5k Jan 13 5.5 straddles for $1.95. (*Note there is some debate weather the trader went synthetically short or shorted the straddle but for education purposes lets assume they sold the straddle.)

Max risk is unlimited, max gain is the credit of $1.95 per spread or $975,000. The spread is short vega (volatility), short gamma, long deltas (right now), and the passage of time helps.

Lets take a look at the risk reward:

This trade is very interesting to me because this trader doesn't lose money between 3.55 & 7.45! Plus he is short volatility which has been on the high side post crisis and ought to come down to the mid 20's unless the economy has an outside shock or double dips (which is always possible). Below is a chart that shows the profitability zone:

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

Trade: XLF May $15/$19 long strangle

The Trade

A trader bought 98,889 May $15 puts at $0.19 and bought 91,080 May $19 calls at $0.13 for a debit of $0.32 or $3,062,931. The spread is long delta, and therefore, has a slight bullish bias.

Risk/Reward

As you can see from the risk/reward graph above, the long strangle has limited risk and unlimited profit potential. The max risk for the strangle is the debit. The lower and upper break even underlying price levels are $14.69 and $19.34. Knowing the characteristics of a long strangle, a large move in the underlying helps, an increase in volatility helps, and the passage of time hurts. Long strangles are very risky because in order to be profitable, they need a large move in the underlying.

The lines shown in the chart above are the lower and upper break even underlying prices. At May expiration, if the underlying is in the range shown above, the spread will be profitable. The 52-week range for XLF is a low of 13.29 and a high of 17.15.

The XLF seeks to provide investment results that correspond to the price and yield performance of the Financial Select Sector of the S&P 500 Index. The Index includes companies from the financial services, insurance, commercial banks, real estate investment trusts, consumer finance, and real estate management and development.

XLF traded 377,404 contracts today compared to average daily volume of 271,410. The top ten XLF components include JPM, WFC, BAC, GS, MS, BK, USB, AXP, MET, TRV.

*Hat tip to MEB Options for pointing this out to us!

Trade: C September $5.5/$6 front spread 1x2

The Trade

A trader bought 50,000 September $5.5 calls at $0.22 and sold 100,000 September $6 calls at $0.12 for a credit of $0.02 or $100,000.

Risk/Reward

As you can see from the risk/reward graph above, the front spread has unlimited risk to the upside and limited profit potential. The unlimited risk is caused by being naked short the higher strike calls. The max gain would occur at an underlying price of $6. At an underlying price of $6, the short calls would expire worthless, and our long calls would be intrinsically worth $0.50 per contract.

The daily chart above shows C dating back to March 2009. At September expiration, the spread would be profitable for any underlying price below $6.52. The 52-week range for C is a low of $3.15 and a high of $5.15.

It's interesting to note that hedge fund manager, David Tepper, raised his Citigroup Inc. stake by 73% in the fourth quarter. Tepper's Appaloosa Management LP's holdings in Citigroup rose to 138.1 million common shares at December 31 from 79.7 million shares at September 30, according to a Form 3F filed with the U.S. Securities and Exchange Commission. Appaloosa also increased their stake in Bank of America, Wells Fargo, and JPMorgan Chase.

A September $5/$5.5 front spread 18,000x36,000 for a credit of $0.03 also traded today.