BAC-WT - Bank of America Warrants

[fareastwarriors]

Bank of America to eliminate 3,000 mortgage jobs

 

 

 

 

http://www.cnbc.com/id/101140949

 

 

Bank of America is looking to cut 3,000 mortgage jobs before the end of the year to cope with declines in refinancing and in its portfolio of delinquent home loans, according to a source.

 

About 1,200 mortgage employees received notice that their position would be eliminated on Thursday. A majority of the 3,000 cuts will come from temporary contractors, though full-time employees will also be laid off, said the source.

 

[gary17]

hi Eric

I've been reading up on BAC for the last few months and finally decided to take a position (commons) when it dropped a bit during the shut down. 

 

I'm wondering if you could shed some light on buying LEAPS -  let say the commons are at 14  and i'm looking at 2016 january calls with 8, 10 and 12 dollar strikes.

 

The premiums are 6.50, 4.85, and 3.55 , respectively.

 

I kinda look at the premiums as buying shares at a 'discount' although they are really part of the options.

 

I haven't done options much - so if BAC is at 20, what would the premiums be at?  Is it not more or less the difference between 20 and the strike price.  This would suggest the lower the strike price the less volatility of the premiums. 

 

I'm wondering if this is the right way of looking at call options.

 

Thanks

[hyten1]

gary i am pretty new to options too

 

for me buying call options is a way to obtain leverage with well defined/limited downside protection.

 

i wouldn't say the premiums are buying at discount, you are actually paying a premium (premium+strike > the stock price)

 

just my 2 cents, eric would know more, i learn a lot about options just by trying to understand erics postings :)

 

EDIT: In terms of how much should a premiums be, well that is a complicated topic, for me obviously i want it as cheap as possible, given the amount of leverage you want and the cost of the leverage also premium+strike i would like it as close to the stock price as possible. but these all depends on a lot of things, the volatility of the stock, the vol, time etc.

[rkbabang]

hi Eric

I've been reading up on BAC for the last few months and finally decided to take a position (commons) when it dropped a bit during the shut down. 

 

I'm wondering if you could shed some light on buying LEAPS -  let say the commons are at 14  and i'm looking at 2016 january calls with 8, 10 and 12 dollar strikes.

 

The premiums are 6.50, 4.85, and 3.55 , respectively.

 

I kinda look at the premiums as buying shares at a 'discount' although they are really part of the options.

 

I haven't done options much - so if BAC is at 20, what would the premiums be at?  Is it not more or less the difference between 20 and the strike price.  This would suggest the lower the strike price the less volatility of the premiums. 

 

I'm wondering if this is the right way of looking at call options.

 

Thanks

 

I'm sure ericopoly can answer this better, but I'll take a stab at it.  Calls have 2 components to their trading price.  One is the intrinsic value of the option itself common price - strike price.  The other component is a little harder to nail down.  Some people call this premium the time-value, because it generally decreases over time, right down to nothing or even negative right before the expiration date. But it isn't as simple as just time, because it varies from day to day or even from minute to minute.  There is also what I'll call a sentiment component to it.  When the stock is dropping the time-value premium seems to decrease (more negative future expectations) and when the stock is rising the time value premium seems to increase (on more positive future expectations).  When I value calls I usually only look at LEAPS that I plan to hold for a long time, so I try to buy on a day when the time value is less and I just expect it to be near zero when I sell them much closer to expiration.

[racemize]

I recommend these threads:

 

http://www.cornerofberkshireandfairfax.ca/forum/strategies/bac-leverage/

 

http://www.cornerofberkshireandfairfax.ca/forum/strategies/google-spreadsheet-for-various-optionswarrants/

 

[ERICOPOLY]

hi Eric

I've been reading up on BAC for the last few months and finally decided to take a position (commons) when it dropped a bit during the shut down. 

 

I'm wondering if you could shed some light on buying LEAPS -  let say the commons are at 14  and i'm looking at 2016 january calls with 8, 10 and 12 dollar strikes.

 

The premiums are 6.50, 4.85, and 3.55 , respectively.

 

I kinda look at the premiums as buying shares at a 'discount' although they are really part of the options.

 

I haven't done options much - so if BAC is at 20, what would the premiums be at?  Is it not more or less the difference between 20 and the strike price.  This would suggest the lower the strike price the less volatility of the premiums. 

 

I'm wondering if this is the right way of looking at call options.

 

Thanks

 

I started the 'BAC Leverage' thread when people complained that the BAC warrants thread wasn't for discussing leverage.  Oh, okay, maybe I'm not being that funny.  But if I start talking about warrants again here on the warrants thread I'm sure I'll get more complaints.

 

Read that thread and it should answer the questions.  There is a lot of discussion about how there are two components to pricing in the option -- one is the difference between $20 and strike (in your example), and the other is the one that is affected by many things, including how far the current stock price is from the strike price. 

 

Anyways, I think you can get a lot of insight just from staring at this table:

http://finance.yahoo.com/q/op?s=BAC&m=2016-01

 

You can see for example how a put option is a higher percentage of the stock price when the stock is nearer the strike price, but puts struck at prices that are further away from the current stock price get cheaper (expressed as a percentage of their respective strike prices).  So in short, to answer your question the calls will be priced the same way as the stock rises to $20.  Every call effectively is logically the same as having the benefit of owning a leveraged common share (without a dividend) and with a put embedded within it (so the leverage is non-recourse).  Well, it's the synthetic equivalent of that logic.  Anyways, if you have another question bring it up on the BAC leverage thread or somebody is going to complain again about discussing leverage on a thread about warrants  :D

[fareastwarriors]

Big Banks Are Padding Profits With 'Reserve' Cash

As Revenue Slows, Some Banks Increasingly Use Loan-Loss Reserves to Boost Income

 

http://online.wsj.com/news/articles/SB10001424052702304682504579155931092819234

[gary17]

 

Is it possible to share the article or any part that's about BAC? Thanks!

 

Big Banks Are Padding Profits With 'Reserve' Cash

As Revenue Slows, Some Banks Increasingly Use Loan-Loss Reserves to Boost Income

 

http://online.wsj.com/news/articles/SB10001424052702304682504579155931092819234

[MYDemaray]

Bank of America released $1.4 billion, comprising 29% of pretax income, and Wells released $900 million, or 11% of pretax income, its biggest release in more than two years. Citigroup released $778 million, down slightly from the second quarter, and the release amounted to 18% of pretax income. At all three, the percentage of pretax income was up from the second quarter, and nonperforming assets have fallen at all four banks at least 18% compared with a year ago.

Bankers say current accounting rules essentially compel them to release reserves when loan losses ease, because the rules use past and current loan losses as the criteria for determining the proper level of reserves. James Dimon, J.P. Morgan's chairman and chief executive, has been particularly vocal on the issue—at one point in 2012, he said that, while the bank wants to be conservative on its reserves, "the accountants look at a whole bunch of numbers. They make you take it down. So we had to take it down."

But critics said banks have more discretion than that, and rule makers at the Financial Accounting Standards Board have proposed changes that would require banks to recognize losses based on expectations of further losses. Such a move would lead banks to record loan losses sooner and set aside reserves more quickly, analysts say.

Those potential changes are still pending, and Mr. Curry said in his speech last month that he supports the "thrust" of the FASB proposal.

[gary17]

Thanks!!

Interesting. So real earning is not as strong yet

 

 

Bank of America released $1.4 billion, comprising 29% of pretax income, and Wells released $900 million, or 11% of pretax income, its biggest release in more than two years. Citigroup released $778 million, down slightly from the second quarter, and the release amounted to 18% of pretax income. At all three, the percentage of pretax income was up from the second quarter, and nonperforming assets have fallen at all four banks at least 18% compared with a year ago.

Bankers say current accounting rules essentially compel them to release reserves when loan losses ease, because the rules use past and current loan losses as the criteria for determining the proper level of reserves. James Dimon, J.P. Morgan's chairman and chief executive, has been particularly vocal on the issue—at one point in 2012, he said that, while the bank wants to be conservative on its reserves, "the accountants look at a whole bunch of numbers. They make you take it down. So we had to take it down."

But critics said banks have more discretion than that, and rule makers at the Financial Accounting Standards Board have proposed changes that would require banks to recognize losses based on expectations of further losses. Such a move would lead banks to record loan losses sooner and set aside reserves more quickly, analysts say.

Those potential changes are still pending, and Mr. Curry said in his speech last month that he supports the "thrust" of the FASB proposal.

[obtuse_investor]

Thanks!!

Interesting. So real earning is not as strong yet

 

 

Another way to look at it is that older earnings that were frozen is now being thawed. It is just a late recognization of the money they already earned.

 

Pre-provision pretax (pptp) income is slowly ticking up over last few quarters.

[Kraven]

Big Banks Are Padding Profits With 'Reserve' Cash

As Revenue Slows, Some Banks Increasingly Use Loan-Loss Reserves to Boost Income

 

http://online.wsj.com/news/articles/SB10001424052702304682504579155931092819234

 

Of course you never see articles that say that income is masked due to rising loan loss reserves.  It's a cycle.  Provisioning goes up during times of crisis and goes down as the crisis passes.

[ERICOPOLY]

Big Banks Are Padding Profits With 'Reserve' Cash

As Revenue Slows, Some Banks Increasingly Use Loan-Loss Reserves to Boost Income

 

http://online.wsj.com/news/articles/SB10001424052702304682504579155931092819234

 

Of course you never see articles that say that income is masked due to rising loan loss reserves.  It's a cycle.  Provisioning goes up during times of crisis and goes down as the crisis passes.

 

You mean you never saw this one?

 

Big Banks Are Exaggerating the Extent of Their Losses With 'Reserve' Cash

 

Or maybe this one from January 2009:

 

Big Banks Are Hiding Their Profits With 'Reserve' Cash

[dcollon]

I will never forget the SEC's decision in late 1999 to force STI to drawn down reserves before completing a merger with Crestar. Battles over reserve levels are always interesting to watch.

 

http://www.journalofaccountancy.com/Issues/1999/Sep/news3.htm

 

[fareastwarriors]

http://www.reuters.com/article/2013/10/28/us-bankofamerica-hustle-bharara-analysis-idUSBRE99R04R20131028

 

Bank of America verdict spotlights U.S. focus on civil cases

[fareastwarriors]

Bank of America Corp.’s Countrywide unit won tentative final approval of a $500 million securities class-action settlement with investors in its devalued residential mortgage-backed securities.

 

http://www.bloomberg.com/news/2013-10-28/countrywide-500-million-rmbs-accord-gets-tentative-approval.html

[timmerjames]

fareastwarriors - send you a pm...just wanted to thank you for posting the bersteinresearch report last year on AIG. -James

[MYDemaray]

So Fitch is out saying a FHFA settlement with BAC could range between $5-8Bn. This was deduced by taking the $57bn of MBS cited in a FHFA lawsuit compared with JPMs $33Bn.

http://www.housingwire.com/articles/27688-fhfa-lawsuit-could-cost-bofa-upwards-of-8b?utm_source=dlvr.it&utm_medium=twitter

 

I'm guessing there is no overlap between the FHFA figures and the previous FAN/FRE settlements -- anyone know of the top of their head?

[mankap]

I was thinking that BAC is done with Fannie/Freddie.But looks like there is more to come.

[MYDemaray]

Seems like there are two different cases here: FHFA vs. Countrywide and FHFA vs. BAC.  As for the former, this from the 10-Q:

 

FHFA Litigation

 

On June 7, 2013, in Federal Housing Finance Agency v. Countrywide Financial Corporation, et al., the U.S. District Court for the Central District of California denied with prejudice FHFA's motion for leave to amend its successor liability claims, based upon fraudulent conveyance theories, against the Corporation.

 

As for the latter, I am scratching my head.  I think these are the relevant cases:

 

FHFA vs. BAC: http://www.fhfa.gov/webfiles/22586/FHFA%20v%20BoA%20Other.pdf

 

FHFA vs. Merrill Lynch: http://www.fhfa.gov/webfiles/22595/FHFA%20v%20Merrill%20Lynch.pdf

 

FHFA vs. JPM: http://www.fhfa.gov/webfiles/22597/FHFA%20v%20JP%20Morgan.pdf

 

Again, not sure these are the relevant cases, but it looks like FAN/FRE bought $33bn from JPM and about $30bn from BAC + Merrill.  Am I barking up the wrong tree?

[nkp007]

This is the most annoying part of the lawsuits. Seems like a game of whack-a-mole.

 

I'm thinking they reserved for at least part of this one. At least they would have known it was coming.

[MYDemaray]

Here's FHFA vs. Countrywide, which has $27bn in face value. So, this is where the Fitch analyst is getting his $57bn....

 

http://www.fhfa.gov/webfiles/22596/Final%20Countrywide%20Complaint%20-%20Filing%20Copy.pdf

 

 

[Kraven]

I am not sure why people are puzzled about the continuous lawsuits.  I've mentioned many times that they will go on much longer than people expect.  Not just for BAC, but all the major banks.  So long as you have a deep pocket and an industry that's out of favor (especially one that is perceived as getting fat on the backs of the average joe), the lawsuits will not end.

[racemize]

I am not sure why people are puzzled about the continuous lawsuits.  I've mentioned many times that they will go on much longer than people expect.  Not just for BAC, but all the major banks.  So long as you have a deep pocket and an industry that's out of favor (especially one that is perceived as getting fat on the backs of the average joe), the lawsuits will not end.

 

I'm mostly confused since I keep thinking the Freddie/Fannie ones are global settlements, and then another one from them comes along.  Presumably, the items they can keep suing on is decreasing each time?

[Kraven]

I am not sure why people are puzzled about the continuous lawsuits.  I've mentioned many times that they will go on much longer than people expect.  Not just for BAC, but all the major banks.  So long as you have a deep pocket and an industry that's out of favor (especially one that is perceived as getting fat on the backs of the average joe), the lawsuits will not end.

 

I'm mostly confused since I keep thinking the Freddie/Fannie ones are global settlements, and then another one from them comes along.  Presumably, the items they can keep suing on is decreasing each time?

 

I have no specifics in mind.  If it's not one party, it will be someone else.  There will always be some deal that has "failed" or some real estate issue that was "caused" by the banks.  This will last, in my opinion, until we get the next boom time whenever that is.  At that point, people forget about suing to make money and worry about getting rich or, in the case of governments, spending all the new tax money they have rolling in.  There's no time at that point to fight old wars.  Everyone sees green!  Then when that bust ends the cycle will start anew.