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BAC: Bullish Trading Ahead of Upgrade

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Bank of America (BAC) saw a flurry of activity in its short-term options Monday before being upgraded by a prominent Wall Street analyst after the close of trading. The stock rallied 4% to $11 even and helped lead the Dow Jones Industrial Average to a triple-digit gain. BAC is moving to its best levels in more than a year. On the options front, December 11 calls saw heavy trading yesterday and were the day's most actively traded equity options contract on the day.

BAC shares are up $0.14 to $11.14 Tuesday morning after Meredith Whitney upgraded the stock along with Discover Financial (DFS) and Citigroup (C). CNBC broke the story after the close of trading yesterday and said the prominent banking analyst predicts that BAC could quadruple its dividend after results of February through March Comprehensive Capital Analysis and Review (CCAR) results are released.

December 11 calls on BAC were the most active equity options Monday. The activity included morning sweeps for just $0.07 per contract when the stock was trading around $10.85 in the early minutes of trading. The market had improved to $0.10 and $0.11 midday. By the closing bell, December 11 calls on BAC were apparently being bought for $0.16 per contract. At the end of the day, more than 100,000 traded at a VWAP of $0.102 per contract. The option, which expires at the end of this week, recently traded for $0.28 Tuesday morning.

BAC December 11 Calls Daily Contract Volume
Source: Trade Alert

Looking forward, BAC has already made a nice run and is trading at its best levels since July 2011. Thirty-day ATM implied volatility in the options on the bank was up 7% to 31.5 Monday and moving off the low end of the 52-week range, which is about 28 (11/23) and 61 (year ago). Sixty-day historical volatility of the shares is about 32%. So, BAC options are relatively "cheap" right now and it's a tempting idea to buy some premium in anticipation of higher volatility in early-2013. However, the stock has now doubled year-to-date. Much of the good news is now possibly baked into BAC's share price and so a pullback on year-end profit-taking is certainly a possibility, setting up a better entry opportunity in early 2013.

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