How To Play Bank Of America's Upcoming Earnings

| About: Bank of (BAC)

On the morning of April 17th, Bank of America (NYSE:BAC) will announce its first quarter earnings results. First quarter analyst expectations are as follows:

Earnings Est Current Qtr.
Mar 13
Next Qtr.
Jun 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate 0.23 0.25 0.98 1.31
No. of Analysts 29.00 29.00 30.00 26.00
Low Estimate 0.15 0.19 0.60 1.01
High Estimate 0.29 0.29 1.16 1.45
Year Ago EPS 0.03 0.19 0.25 0.98

Revenue Est Current Qtr.
Mar 13
Next Qtr.
Jun 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate 23.50B 22.73B 90.99B 92.11B
No. of Analysts 21 21 25 21
Low Estimate 21.59B 21.24B 85.99B 87.07B
High Estimate 24.99B 23.68B 95.32B 97.96B
Year Ago Sales 22.28B 21.97B 86.33B 90.99B
Sales Growth (year/est) 5.50% 3.50% 5.40% 1.20%

Earnings History Mar 12 Jun 12 Sep 12 Dec 12
EPS Est 0.12 0.14 -0.07 0.02
EPS Actual 0.03 0.19 0.00 0.03
Difference -0.09 0.05 0.07 0.01
Surprise % -75.00% 35.70% 100.00% 50.00%

And here's how BAC has been performing lately:

(Click to enlarge)

After touching a high near $12.75, the stock has since corrected and started to condense a bit. Heading into these earnings, BAC has plenty of room to continue to grow if they can hit the metrics that investors are looking for. They continue to be one of the largest banks in the world, have strengthened their balance sheet through 2012 and are finding success with the new check and cash reading automated deposit features built into its new ATMS; a technology it is spearheading.

Its vitals are as follows:

Range -
52 week 6.72 - 12.94
Open -
Vol / Avg. 621,541.00/149.23M
Mkt cap 132.79B
P/E 50.89

Div/yield 0.01/0.32
EPS 0.24
Shares 10.78B
Beta 2.38
Inst. own 59%

With a rather astronomical P/E ratio of 50.89 and a beta of 2.38, BAC definitely qualifies as a stock that is susceptible to big market correction pulling it down.

How I'd Trade Earnings

Just due to the wild beta and a lot of future excitement already being priced into the current price, BAC is in no way a definite bullish call for me. That's interesting for me, in particular, because I've been bullish on BAC since it was around $7, as I genuinely enjoy using it as a bank and think it is a good, reputable brand that has staying power.

Also, I've read about serious interest in BAC puts of lately, indicating the market thinks we're going to get a correction in BAC's price:

The shares of Bank of America Corp (NYSE:BAC) are up 0.9% at $12.32, and are poised to end back atop their 20-day moving average for the first session in eight. Nevertheless, some options traders are gambling on a short-term pullback for the stock, which has added nearly 38% in the past year, and touched a new annual high of $12.94 just three weeks ago. More specifically, BAC's April 12 put is the most popular option thus far, with nearly 9,200 contracts exchanged.

Digging deeper, 92% of the puts have crossed at the ask price, and implied volatility is trending higher, hinting at buy-to-open activity. The front-month puts are trading at a volume-weighted average price (VWAP) of $0.18, meaning the buyers will begin to profit if Bank of America Corp breaches the $11.82 level (strike minus VWAP) by options expiration on Friday, April 19 -- just two sessions after the company's scheduled turn in the earnings confessional. However, should BAC resume its longer-term ascent, the most the buyers can lose is the initial premium paid for the puts.

The P/E and beta make me extremely nervous, as someone who thinks that the market as a whole is going to be correcting soon. I'm also semi-confident that BAC can meet or exceed analyst expectations, but let's play this one safe using one of a couple methods:

  • Buy the stock today @ about $12/share and write contracts for $12.50 or $13 that expire April 26th, yielding instant premiums of $0.23 for every share you own. The upside is limited if you're exercised at $12.50 on an earnings run, but on a price correction, you pocket the premiums and can DCA with your underlying stock.
  • Buy the stock today and buy insurance with vanilla puts. $12 puts that expire April 26th are 0.20/share premium. If the stock runs you lose your premium. If the stock tanks, you cash your puts and still hold the underlying stock, which you can DCA or sell outright.
  • Play an options strangle spread. A $11.50/$13.50 strangle that expires April 26th will cost you barely anything. In total, you're paying 0.11/share premium. That puts your breakeven at below $11.39 or above $13.61 plus whatever commissions you pay. This is a very cheap way to take a gamble.

Whatever method you choose, be safe, remember to always take profits, and best of luck.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.