BAC-WT - Bank of America Warrants

[hyten1]

i have to say the recent drop have been fast and furious... not fun

[gokou3]

Would have been good to sell BAC at 18$. I wish I did..

 

I am one of the lucky bastards who sold the 2016 $12 calls just before x'mas when BAC was above $18.  Right now at $15.2x or P/B ~0.7, BAC is closed to a point that I want to re-enter the 2017 calls.

[rkbabang]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

[gr33ngi4nt]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

Agreed. Is anyone still in the 2016s? Does it make sense to take the tax loss and roll them forward to 2017s?

[Crip1]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

 

I don't see where the big picture has changed appreciably, so, it it was reasonably priced in the US$7.50 range, then this is definitely on sale. I doubled my position today on the warrants.

 

 

-Crip

[benchmark]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

Agreed. Is anyone still in the 2016s? Does it make sense to take the tax loss and roll them forward to 2017s?

 

I still have a lot of 2016s, and am debating the same things -- didn't expect the fast drop -- though I think that it's likely that we'll recover some, probably not alway the way when the stock was at $18.

[Uccmal]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

Agreed. Is anyone still in the 2016s? Does it make sense to take the tax loss and roll them forward to 2017s?

 

I have 50 2016 contracts - $15 strike still - at Christmas I had about 150 of these.  The remaining 50 went under water today.

This morning I sold 50; 2017 $20.00 strike to rise cash (at a loss). 

Just before the close I bought 100 2017 x 17 strikes.  I know I was going to get out of Leaps but then Mr. Market over reacted.  Overall I hold 700 Leaps. 

Bought 4000 common shares earlier this week. 

 

In summary, I cant answer your question.  I can barely answer my own.  I just shove my hands in the muck and act under situations like today.  As per Crip's comment above the thesis is relatively unchanged.  Earnings came in exactly where I expected.  BAC stock is going to be driven more by slow incremental improvement going forward rather than big catalysts.  To some extent it has moved from being a recovery story to a bet on America, and a bet on management to stay rational going forward. 

 

John Stumpft (sp?) over at WFC indicated yesterday that mortgage revenue should rise substantially this year with the new Freddie/Fannie rules.  Also, after a very slow 2014, one could expect things to pick up as the year progresses. 

 

Moynihan seems to be a conservative banker of the old style, like management at Wells Fargo.  I would rather he were like that then the swashbucklers who used to run BAC. 

 

Right now the 3 billion in earnings got pasted to the balance sheet (2.5 after the dividend).  I figure we are in for a div. increase to 0.40 per share this year which adds up to 4 billion.  That would be 4 billion out of a probable 15 B in earnings.  Based on todays price that would bring the div. yield to 2.6% which equals Wells and JPM - notice that Wells and JPM trade close to that yield and are less volatile. 

 

'nuff said. 

 

 

 

 

[Uccmal]

Not enough said:

 

We are two weeks into the new Quarter which mean that another 250 Million has been earning on a GAAP basis, more on an after tax basis.

[gokou3]

i have to say the recent drop have been fast and furious... not fun

 

No not fun at all.  This is the 2nd time in less than a year that I really wish I had sold everything and bought it all back a few weeks later. Next time BAC is over $18 my trigger finger is going to be really itchy.

 

Agreed. Is anyone still in the 2016s? Does it make sense to take the tax loss and roll them forward to 2017s?

 

Ignoring tax and assuming you are rolling at the same strike, I think it's more advantageous to roll forward in time when the underlying is "high", as opposed when the underlying has just experienced a price drop like today.  The reason is that option premiums fluctuate more for options with near-dated options (this makes sense because the near-dated options have less time remaining to make up for the losses; the end game is more certain, all else equal).  The attached graphic shows that in today's BAC drop, the near-dated options drop more than the far-dated ones.

 

 

 

[Vish_ram]

You selected strike 15, that may just expire worthless tomorrow. The deep in the money do not show this much variation. The % change is not a good indicator as it is the change from last trade. For periods/strike that dont trade much, %change may be big.

 

I've few $10 and $12 calls expiring tomorrow. I'm going to exercise strike 10 and rollover X12 to 2017. I gave up a lot of paper profit. The only good thing I see is that I've to pay less taxes when I roll forward.

 

[finetrader]

I'm getting worried about the drop in the 10 year US bond and the potential NIM compression.

 

Anyone else has anything to say about it?

 

[valueyoda]

The 10 year yields are highly oversold -  reflecting declining inflation expectations brought down by lower commodity prices - causing declines in all major money center banks and insurance companies. Most of these stocks have been flat since late 2013, even though tangible book value per share has grown decently, providing an interesting entry point for BAC, C, JPM, AIG and MET.

[plato1976]

say if 10y will eventually go to 1% and stay there for a few years, what will happen to these names in terms of valuation? still cheap?

 

The 10 year yields are highly oversold -  reflecting declining inflation expectations brought down by lower commodity prices - causing declines in all major money center banks and insurance companies. Most of these stocks have been flat since late 2013, even though tangible book value per share has grown decently, providing an interesting entry point for BAC, C, JPM, AIG and MET.

[gokou3]

You selected strike 15, that may just expire worthless tomorrow. The deep in the money do not show this much variation. The % change is not a good indicator as it is the change from last trade. For periods/strike that dont trade much, %change may be big.

 

I've few $10 and $12 calls expiring tomorrow. I'm going to exercise strike 10 and rollover X12 to 2017. I gave up a lot of paper profit. The only good thing I see is that I've to pay less taxes when I roll forward.

 

The $10 and $17 show similar patterns too.  BAC options are quite liquid so many contracts have large daily volumes.  Ignore the thinly traded ones and the conclusion is the same.  Besides, I think the primary concern now is rolling over from Jan 2016 to Jan 2017. 

 

If one calculates option delta, I am pretty sure the conclusion would be the same.

 

 

 

 

[ERICOPOLY]

say if 10y will eventually go to 1% and stay there for a few years, what will happen to these names in terms of valuation? still cheap?

 

The 10 year yields are highly oversold -  reflecting declining inflation expectations brought down by lower commodity prices - causing declines in all major money center banks and insurance companies. Most of these stocks have been flat since late 2013, even though tangible book value per share has grown decently, providing an interesting entry point for BAC, C, JPM, AIG and MET.

 

 

A few years?  I'll take that at face and say it means three years...

 

How much do you expect that to hurt their annual earnings?  Then just multiply by 3.  Right, so let's say it drags down earnings by 50 cents a year (I'm just making it up, not running the math).

 

0.50x3, so the discount should be roughly $1.50.

 

Alright, so if you thought it was worth 12x earnings, and you thought the normalized earnings were $2, then...

 

12x2 = $24.

 

Then knock 1.50 off it....

 

So then it's worth roughly $22.50 today in that case.  Approximately, because I made up the 50 cents a year earnings shortfall and I also am not adjusting the 1.50 per year for the time value of money (so I'm overstating the discount).

 

[hyten1]

vish_ram,

 

i thought i was the only guy with $10 calls expiring tomorrow :(

 

curious why you would exercise (which would mean you lose the long term cap gain, assuming your call is long term cap) vs sell the call and buy the stock directly? I am asking is because i am in the same boat. I decide to sell (should of sold it 2 weeks ago).

 

what are others thought on JPM vs WFC vs BAC.

 

I am very impressed by JPM and WFC both earnings over 20bil a year already in the current environment, how much would they earn when their NIM improves as the rates rise.

 

 

 

You selected strike 15, that may just expire worthless tomorrow. The deep in the money do not show this much variation. The % change is not a good indicator as it is the change from last trade. For periods/strike that dont trade much, %change may be big.

 

I've few $10 and $12 calls expiring tomorrow. I'm going to exercise strike 10 and rollover X12 to 2017. I gave up a lot of paper profit. The only good thing I see is that I've to pay less taxes when I roll forward.

[Vish_ram]

vish_ram,

 

i thought i was the only guy with $10 calls expiring tomorrow :(

 

curious why you would exercise (which would mean you lose the long term cap gain, assuming your call is long term cap) vs sell the call and buy the stock directly? I am asking is because i am in the same boat. I decide to sell (should of sold it 2 weeks ago).

 

what are others thought on JPM vs WFC vs BAC.

 

I am very impressed by JPM and WFC both earnings over 20bil a year already in the current environment, how much would they earn when their NIM improves as the rates rise.

 

 

 

You selected strike 15, that may just expire worthless tomorrow. The deep in the money do not show this much variation. The % change is not a good indicator as it is the change from last trade. For periods/strike that dont trade much, %change may be big.

 

I've few $10 and $12 calls expiring tomorrow. I'm going to exercise strike 10 and rollover X12 to 2017. I gave up a lot of paper profit. The only good thing I see is that I've to pay less taxes when I roll forward.

 

If I sell the call and buy stock, I'll pay taxes on option gains. If I exercise l'll have a reduced cost basis and avoid the tax.

[hyten1]

vish, agree and understand

 

but you are converting your long term option cap gain to short term common gain the minute you exercise no?

 

yes i understand you do delay the tax until further notice. i guess if that is your goal than i totally understand. i don't  like paying tax too. But i don't like converting my current long term cap gain to a short term one the minute i exercise (or do i  have this wrong?).

 

hy

 

vish_ram,

 

i thought i was the only guy with $10 calls expiring tomorrow :(

 

curious why you would exercise (which would mean you lose the long term cap gain, assuming your call is long term cap) vs sell the call and buy the stock directly? I am asking is because i am in the same boat. I decide to sell (should of sold it 2 weeks ago).

 

what are others thought on JPM vs WFC vs BAC.

 

I am very impressed by JPM and WFC both earnings over 20bil a year already in the current environment, how much would they earn when their NIM improves as the rates rise.

 

 

 

You selected strike 15, that may just expire worthless tomorrow. The deep in the money do not show this much variation. The % change is not a good indicator as it is the change from last trade. For periods/strike that dont trade much, %change may be big.

 

I've few $10 and $12 calls expiring tomorrow. I'm going to exercise strike 10 and rollover X12 to 2017. I gave up a lot of paper profit. The only good thing I see is that I've to pay less taxes when I roll forward.

 

If I sell the call and buy stock, I'll pay taxes on option gains. If I exercise l'll have a reduced cost basis and avoid the tax.

[Uccmal]

say if 10y will eventually go to 1% and stay there for a few years, what will happen to these names in terms of valuation? still cheap?

 

The 10 year yields are highly oversold -  reflecting declining inflation expectations brought down by lower commodity prices - causing declines in all major money center banks and insurance companies. Most of these stocks have been flat since late 2013, even though tangible book value per share has grown decently, providing an interesting entry point for BAC, C, JPM, AIG and MET.

 

Valuations could even go up.  People reaching for yield and all that good stuff.  The ten year returns 1% and a SIFI bank yields 2.5%. : 60 cent per yr. div. and buyback / .025 = $24.  At some percentage yeild in a very low long bond environment the  payouts of these banks will protect their stock.  A SIFI regulated bank is looking pretty safe these days.  The balance sheet of BAC is so vastly different from what it was 5 years ago. 

[innerscorecard]

http://www.bloombergview.com/articles/2015-01-15/bank-of-america-spent-some-future-money-last-year

[Vish_ram]

vish, agree and understand

 

but you are converting your long term option cap gain to short term common gain the minute you exercise no?

 

yes i understand you do delay the tax until further notice. i guess if that is your goal than i totally understand. i don't  like paying tax too. But i don't like converting my current long term cap gain to a short term one the minute i exercise (or do i  have this wrong?).

 

hy

 

 

sorry, I don't understand what you mean by "converting my current long term cap gain to a short term". Exercising a call is not a taxable event. I'll end up with a lower cost basis and when I sell it, I've to pay the tax man. I don't plan on selling BAC as long as WEB is keeping it.

[vinod1]

I got lucky. I made three changes over the last few weeks

 

1. Reduced my exposure to BAC dramatically as it moved into the high $17's as I felt the margin of safety is much less at that price.

 

2. Moved all the LEAPS to Warrants as I felt that the warrants are a much better deal.

 

3. I hedged 20% of the warrants with BAC $15 puts and 20% with Russell 2000 $110 puts.

 

All three paid off. Sold off the BAC puts today. Need to take a fresh look how to increase my exposure again.

 

I now await the market gods to punish me for bragging.

 

Vinod

 

 

[hyten1]

what i meant was

 

Lets say you have a long term gain on it of $10k currently on your Jan 15 $10 calls. If you sell this tomorrow you will pay "long term capital gains tax" on that $10k.

 

now if instead you exercise the the  option at $10 that $10k gain all of sudden is now short term because that gain is now part of the stock you just purchase by exercising the option. that is because the purchase date of the stock would be jan 15, 2015. If you decide to sell the common stock you just bought by exercising the option, you will pay "short term cap gain tax" on that $10k (to avoid this you have to wait 1 more year for it to be long term).

 

hope this is clear? or maybe i have this wrong.

 

obviously if you plan to keep for a very long time. it doesn't really matter.

 

 

vish, agree and understand

 

but you are converting your long term option cap gain to short term common gain the minute you exercise no?

 

yes i understand you do delay the tax until further notice. i guess if that is your goal than i totally understand. i don't  like paying tax too. But i don't like converting my current long term cap gain to a short term one the minute i exercise (or do i  have this wrong?).

 

hy

 

 

sorry, I don't understand what you mean by "converting my current long term cap gain to a short term". Exercising a call is not a taxable event. I'll end up with a lower cost basis and when I sell it, I've to pay the tax man. I don't plan on selling BAC as long as WEB is keeping it.

[yitech]

http://www.bloombergview.com/articles/2015-01-15/bank-of-america-spent-some-future-money-last-year

 

Rates Go Down, and So Do Bank of America’s Earnings

http://blogs.wsj.com/moneybeat/2015/01/15/rates-go-down-and-so-do-bank-of-americas-earnings/?mod=yahoo_hs

 

Higher value in prepayment options embedded in MBS are in the money, thanks to the drop in 10Y Treasury yield.

 

"Rates fell significantly during the fourth quarter – the yield on the 10-year Treasury note declined by about 0.3 percentage points during the period. Such a decline, among other things, prompts more people to want to pre-pay or refinance their mortgages, to take advantage of the lower rates."

 

"Bank of America has already been hurt by low rates. Its net-interest-margin, a bank profitability metric often correlated to higher long-term rates, fell to 2.18% in the fourth quarter from 2.44% a year ago."

[ERICOPOLY]

http://www.bloombergview.com/articles/2015-01-15/bank-of-america-spent-some-future-money-last-year

 

Rates Go Down, and So Do Bank of America’s Earnings

http://blogs.wsj.com/moneybeat/2015/01/15/rates-go-down-and-so-do-bank-of-americas-earnings/?mod=yahoo_hs

 

More prepayment options embedded in MBS are in the money, thanks to the drop in 10Y Treasury yield.

 

"Rates fell significantly during the fourth quarter – the yield on the 10-year Treasury note declined by about 0.3 percentage points during the period. Such a decline, among other things, prompts more people to want to pre-pay or refinance their mortgages, to take advantage of the lower rates."

 

"Bank of America has already been hurt by low rates. Its net-interest-margin, a bank profitability metric often correlated to higher long-term rates, fell to 2.18% in the fourth quarter from 2.44% a year ago."

 

I thought the decline in NIM was due to what they posted on page 3 of their presentation today:

 

$0.6B negative market-related adjustments to net interest income driven by the acceleration of bond premium amortization on debt securities due to lower long-term rates