(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Traders are betting that shares of Bank of America Corp. (BAC) will outperform both JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) based on options pricing. Using a long straddle strategy shows the options market is expecting shares of Bank of America to rise by nearly 10 percent by expiration on January 19, while Citigroup is expected to rise by only 8.5 percent, with a 7 percent move expected in JPMorgan.

The long straddle is a strategy that involves buying both a put and call, providing a range in which the stock price needs to trade above or below to break even. The three mega banks are expected to report quarterly results this Thursday and Friday. 

Options can provide insights into how the market is betting or thinking about the future direction of a company and its stock price. For Bank of America, the call options outnumber the puts options at the $26 strike price by nearly 6:1. This indicates that traders are betting heavily that the stock will rise by expiration in January. 

Big Bets On Bank of America

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The long straddle using the $26 strike price suggests that Bank of America shares could trade in a range of $23.50 to $28.50. That is because the cost to buy both the put and call is about $2.55. The trader would need the price of the stock to rise above or the below the range to profit.

The calls are favored by nearly 6:1, with an open interest of 60,000 call options, and only 10,000 puts options. The $27 strike price has 246,000 contracts open on the calls. The premium is about $0.80, meaning the stock price needs to rise to about $27.80 to break even. The open interest on the $27 call options is worth about $19.6 million – no small bet. 

Citigroup Close Second

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Citigroup is seeing plenty of buying interest as well, with the market pricing in a rise or fall of about 8.5 percent using the $77.50 strike price, long straddle strategy. The $80 strike price also has significant open interest, with 48,000 call contracts open versus only 3,600 puts.

The premium of $2.20 implies a move for Citigroup of 8.3 percent, or $6.30, or a rise in its stock to $81.35 for a breakeven price from its current level of $75.

JP Morgan- Last But Not Least

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JPMorgan shares are pricing in a rise of about 7 percent by January using the $97.50 strike price long stradde. The calls are again favored, with 7,500 contracts open, versus only 2,000 puts. 

Options traders seem to be very bullish over all on the three mega banks, but seem to like Bank of America the best. (See also: BofA CEO Has Done a ‘Sensational Job’: Buffett.)


Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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