Options: A Look at BAC, JPM, WFC Volatility

With the mixed signals from the stimulus package and Treasury Secretary Timothy Geithner now hard at work, options volatility for bank stocks presents interesting opportunities.
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Glad to have the monthly unemployment numbers in the rearview mirror so the market can start to move down the road to recovery ... or not.

The market culprits of the financial stocks and the

Financial Select Sector SPDR

(XLF) - Get Report

have rebounded from recent lows.

Bank of America

(BAC) - Get Report

rallied big again today, up 20%, after a key technical reversal with lows under $4 and closing higher on the day Thursday. With the mixed signals from the stimulus package and Treasury Secretary Timothy Geithner now hard at work, options volatility for bank stocks presents interesting opportunities.

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The old days of anticipating rate changes with the heft of Alan Greenspan's briefcase going into

FOMC

meetings has given way to uncertainty in fiscal policy. Secretary Geithner has failed to telegraph his remedies to the economic crisis, and the impending news conference on Monday has traders searching for direction.

The key for today's observation is the simple fact that February options expire Feb. 20, only two weeks away. The straddles for some of the big boys in banking, always changing as we speak, are priced at extreme levels. Lesson No. 1 in trading is to remind ourselves often that things can always get

more

extreme. A "high" VIX at 50 got much higher and moved to 80 as fear reached peak levels this fall.

Everything is relative, but presently some straddles are lofty in terms of percentage of strike price. A significant move is priced into the February positions with only two weeks to go before expiry.

Let's take a look at the headliner BAC trading at $5.95. The $6 straddle is now sitting at $1.02 for the call and $1.07 for the put. The total premium of $2.09 is an astronomical 35% of the strike price. This means the break-evens on the trade are $3.97 on the downside, and $8.09 on the upside.

Another stock to look at is

Wells Fargo

(WFC) - Get Report

, trading at $18.55. No 18 strike prices exist, so we use the 19 strikes, which are priced at $1.95 for the call and $2.50 for the put.

The total straddle premium is $4.45, or more than 23% of strike. Since the break-evens are closer on a percentage basis than the BAC straddle, investors expect less relative volatility and a tighter expected range from WFC.

One bank that has been somewhat immune to the financial beatdown so far has been

JPMorgan Chase

(JPM) - Get Report

. JPM is trading at $26.45 and the option strangle is also worth a look, sitting at $3.87, which is almost 15% of strike. The 27 call is at $1.92 and the 26 put is $1.95. The upside is $30.87 and the downside is $22.13 for break-even levels with two weeks to go.

As we all know, a lot can happens in the markets in two weeks. The straddles and strangles for some of the financials are pricing big potential moves into their options. Enjoy the fortnight.

Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."