Company:

Bank of America
NYSE: BAC $11.95

Exam I (Option Picking Report)

By Mrunmayi Deshmukh

My Recommendation: Buy a call option at $12 strike price (expiring on 26th Feb, 2016)

Why BAC

BAC has been bearish over the past few

days. On 11th Feb. 2016 there has been a

huge drop in the stock price because
people considered it a right time to sell
(High volume of trade). The main reason
to this behavior can be attributed to the
pressure from the state of Chinese
economy and the concerns about Bank of
Americas European counterparts.

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00

Fundamental Analysis of BAC

Although there continues to be a struggle given reduced expectations around a potential Fed
rate hike, in the next few days the stock price is expected to increase. The core banking
business is based on taking deposits and making loans. This key metric in assessing the
profitability of this business is called Net Interest Margin (NIM). According to the latest
update, Janet Yellen says that USA would not go into negative interest rates and that the
interest rate hike has just been postponed and not cancelled altogether. This hike will allow
BAC to increase its NIM and this effect will be reflected in BACs stock price. The CEO also
mentions that in 2016 they expect to continue to focus on responsible growth and will
continue to drive the investments made in their franchise to deliver to the shareholders.
Alternatively, high interest rates might result in an outflow of dollar to other more attractive
investment markets and may also slow down domestic spending.
Therefore, BAC stock price is expected to increase but not drastically. It is going to
outperform the market and therefore we should buy a call option on that stock. It is also
traded in high volumes therefore has high liquidity.

Condition to win
If the stock prices rises and
crosses the strike price i.e.
$12.50, we would be in the
money. At this point out profit
will be the difference in the strike
price and the stock price at
expiration date minus the
premium amount.
If the stock price falls, we will not
exercise the option but will loose
the premium that we paid to buy
the call option. We can hedge this
position by buying equal number
of put contracts.