BAC-WT - Bank of America Warrants

[boilermaker75]

 

I sell slightly OTM puts with as short a time to expiration as possible so as to get at least $0.15 per share. So the time frame is often from less than a week to about two weeks. I try to do the same with the covered calls. With positions I have been put to I sometimes have to write longer time frames to get my > $0.15 per share. Currently I have some positions where I was put to at $17 per share. I currently do not have calls written against those shares.

 

Why $0.15 as the threshold? For example, BAC April 24th $15.5 put is now at $0.15?

 

And I wrote some April 24th 15.5 strike puts. I want to keep the time to expiration as short as possible. There is much more time value per week for the April 24th options than the May 1 option,more for the May 1 than May 8, etc. I also want to make sure the commissions are not a big factor so why I want to get at least 15 cents per share.

[benchmark]

 

I sell slightly OTM puts with as short a time to expiration as possible so as to get at least $0.15 per share. So the time frame is often from less than a week to about two weeks. I try to do the same with the covered calls. With positions I have been put to I sometimes have to write longer time frames to get my > $0.15 per share. Currently I have some positions where I was put to at $17 per share. I currently do not have calls written against those shares.

 

Why $0.15 as the threshold? For example, BAC April 24th $15.5 put is now at $0.15?

 

And I wrote some April 24th 15.5 strike puts. I want to keep the time to expiration as short as possible. There is much more time value per week for the April 24th options than the May 1 option,more for the May 1 than May 8, etc. I also want to make sure the commissions are not a big factor so why I want to get at least 15 cents per share.

 

Thanks. I guess I'm trying to figure out how much premium is a good value to use the strategy. Are you using IB for this, given commission is a big part of any option trade?

[boilermaker75]

 

I sell slightly OTM puts with as short a time to expiration as possible so as to get at least $0.15 per share. So the time frame is often from less than a week to about two weeks. I try to do the same with the covered calls. With positions I have been put to I sometimes have to write longer time frames to get my > $0.15 per share. Currently I have some positions where I was put to at $17 per share. I currently do not have calls written against those shares.

 

Why $0.15 as the threshold? For example, BAC April 24th $15.5 put is now at $0.15?

 

And I wrote some April 24th 15.5 strike puts. I want to keep the time to expiration as short as possible. There is much more time value per week for the April 24th options than the May 1 option,more for the May 1 than May 8, etc. I also want to make sure the commissions are not a big factor so why I want to get at least 15 cents per share.

 

 

Thanks. I guess I'm trying to figure out how much premium is a good value to use the strategy. Are you using IB for this, given commission is a big part of any option trade?

 

I use IB and Schwab. I negotiated a lower rate with Schwab. But IB is still better especially since there is no commission for being assigned with IB.

[ERICOPOLY]

Here is something that is fascinating.

 

These are the number of 60+ days delinquent first mortgage loans within Legacy Assets & Servicing:

 

Q1 2011 :  1,300,000

Q2 2011 :  1,280,000

Q3 2011 :  1,230,000

Q4 2011 :  1,160,000

Q1 2012 :  1,090,000

Q2 2012 :  1,060,000

Q3 2012 :  936,000

Q4 2012 :  773,000

Q1 2013 :  667,000

Q2 2013 :  492,000

Q3 2013 :  398,000

Q4 2013 :  325,000

Q1 2014 :  277,000

Q2 2014 :  263,000

Q3 2014 :  221,000

Q4 2014 :  189,000

Q1 2015 :  153,000

That's what you would expect, why is this surprising?

 

It's surprising because they still have $1b a quarter expenses (excluding litigation).  What are they spending this money on?

[ERICOPOLY]

They have 16% of their total capital allocated to LAS.  What a resource pig for a segment that loses money.

[wescobrk]

I remember a couple of years ago Moynihan said 13-14% ROTCE by 2016 now he is backing it down to 12-13%.

I wouldn't be surprised if he backs it down again.

[Uccmal]

* controversial *

 

I'm long and I really don't get all the BM hate. We are just a few years past the biggest crisis of our lives after which we collectively wanted to hang all bankers for almost blowing up our society but now, after one year of stock underperformance, the complaining starts. "All my stocks doubled except for BAC. Moynihan lacks charisma. We need a real banking CEO who takes risks. Return more capital!". New bull market, lessons forgotten.

 

As far as I am concerned they are doing ok. Slow but steady. Yes - it is a boring stock now with no catalyst in sight. If you don't like that, buy TSLA.

 

I dont think your perspective is controversial at all.  I still hold 300 x 2017 contracts at $13 and $15 strike price.  The problem with the options, as you know, is they require a relatively fast run up to make any money.  If that doesn't occur it becomes opportunity cost, or worse.

 

Now, I can sit here and hope that BAC gets their stuff together enough that the stock trades up enough to bring my options well into profit.  I can sell and buy the common stock, or I can sit on the options and convert them to common in Jan. 2017.  Choosing the last option I would end up with a commitment of roughly $400,000 USD in Jan. 2017, which is alot, and would make Bac my largest or second largest position - I would rather not do that.  For information purposes, I have held up close to 1000 options on BAc in the past. 

 

Looking at the common stock since that is what drives the Leaps, now that there is much more clarity on the balance sheet and where it is headed.  It doesn't grab me the way it used to.

 

Peer group: JPM has an ROE ~ 10%; 2.7% dividend yld., buyback program similar to BAC, trades at 1.3 x TBV.  Barring an economic collapse we can reasonably predict that JPM will be trading at about 75 in about two years,  higher if interest rates rise, and there is Roe, and Pe expansion.  We also get paid 3.00 to wait

 

WFC: WFc has an ROe ~ 14.5%; 2.7% dividend yield, a buyback program, trades at 1.9 TBV.  It should trade at $70.00 in 2 years.  I doubt it will get much multiple expansion right now.  And we get 3.00 while we wait.

 

BAc: Had an Roe of 2% last year.  Lets say we get 8% over the next two years; 1.3% dividend yield, buyback program, trades at 1.1 TBV.  I get paid 0.40 while I wait (maybe 0.60 after August). We might get a stock price around $18.00 in two years.  If, And a big if, interest rates rise, BAC improves its returns dramatically we mat get substantial multiple expansion.  I think the big catalysts for the stock price are gone.  I expect slow steady improvement. 

 

But is Bac a better investment than either of the others, or other investments in general?  In terms of the other two banks I would have to say, Maybe/Maybe not.  It may be better contingent on interest rates, and greater incremental improvement.  It certainly has a margin of safety, but so do the others. 

 

In comparison to other investments available such as Seaspan or Mullen Group, at their present stock prices, it doesn't measure up as a common stock.  As compared to FFh it doesn't measure up. 

 

Therefore, my only reason for being in BAc has been, and will be the Potential of the Leaps.  Given the degree of uncertainty in the timing and effect of interest rate increases, and multiple expansion, there is certainly a risk to the Leaps I still hold.  It isn't the no brainer it was 3 or 4 years ago.  I have common stock in my Wife's account I bought at around $8.10 that I will keep for now. 

 

I will probably reduce my $15 Leaps position and wait things out until October when the next cycle comes out. 

 

Alot of rambling, more to clarify my own thinking than argue with anyone else. 

[rjstc]

May be rambling but still interesting to read. Good back of the envelope stuff.

[FCharlie]

It seems like most here think BAC is dead money, or at best will only rise somewhat.

 

Does anyone think it is going lower?

 

 

[finetrader]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

[Uccmal]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more. 

[tylerdurden]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more.

 

Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks.

[CorpRaider]

Whelp, Morgan Stanley and STI crushed it too.  Can you think of any large (American or Canadian) financial institutions that would eagerly swap C-suites with BAC?

[benchmark]

Whelp, Morgan Stanley and STI crushed it too.  Can you think of any large (American or Canadian) financial institutions that would eagerly swap C-suites with BAC?

 

Almost all of them, JPM, WFC, USB, Morgan just to name a few, even C's CEO seems like more competent :(

[obtuse_investor]

Oh how the times have changed.

 

It feels like it was not even a couple years ago that Moynihan was celebrated as a great leader on this very thread-- not in an inspiring sense, but rather as a prudent hard nosed technical banker.

 

And now his overall competency is being questioned.

 

... Just an observation.

[benchmark]

Oh how the times have changed.

 

It feels like it was not even a couple years ago that Moynihan was celebrated as a great leader on this very thread-- not in an inspiring sense, but rather as a prudent hard nosed technical banker.

 

And now his overall competency is being questioned.

 

... Just an observation.

 

Fair enough, he was probably the right person to settle all the law suits, which was what BAC needed. It's time that we get an actual banker now,  I'm not sure that he is the right person.

[tylerdurden]

Oh how the times have changed.

 

It feels like it was not even a couple years ago that Moynihan was celebrated as a great leader on this very thread-- not in an inspiring sense, but rather as a prudent hard nosed technical banker.

 

And now his overall competency is being questioned.

 

... Just an observation.

 

Fair enough, he was probably the right person to settle all the law suits, which was what BAC needed. It's time that we get an actual banker now,  I'm not sure that he is the right person.

 

To me, BAC is very well positioned for traditional banking, when banks can do what they are supposed to do: Get deposits with low rates and loan them with higher yields. I don't think Moynihan can decide the timing for this but eventually it is going to happen. They are winding down the LAS, cutting down expenses as much as possible w/o damaging the business etc. Not sure what an "actual banker" can do else... 

[benchmark]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more.

 

Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks.

 

If you look at USB, or WFC, they are operating in the same low rate environment, but they are more efficient -- for example, I don't understand why BAC's expense went way up this Q vs Q4/14.

[tylerdurden]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more.

 

Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks.

 

If you look at USB, or WFC, they are operating in the same low rate environment, but they are more efficient -- for example, I don't understand why BAC's expense went way up this Q vs Q4/14.

 

I think every bank is coming from a different place. All the issues that BAC had to deal with for last several years do not compare to USB or WFC's recent history. It is very gradual improvement but I don't think there is any easy way out. In terms of the expense, it makes more sense to compare Q115 to Q114 since the Q1 is seasonally stronger in terms of trading revenues therefore the related compensation is higher as well. Core expenses are 13.8B vs 13.6B vs 13.3B in Q113, Q114 and Q115, respectively so it is going towards the right direction. Moynihan also mentioned they don't want to decrease too much cost in order to be ready when business picks up. Unless they believe the outlook is really grim, they won't cut costs drastically going forward...

[Uccmal]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more.

 

Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks.

 

Hi Tyler, I do look at the warrants.  I guess my real question is:  Knowing what we know today: Is BAC a good investment compared to other choices today?  What would you project the returns on the common and the warrants going forward 3.75 years? 

 

[tylerdurden]

We might get a stock price around $18.00 in two years. 

 

That would be about 10% annualized return from today's price. Plus a have a free option on rising rates.

 

Not too bad. To me it is not an environment to be too greedy.

 

 

 

 

With the common - Its actually 8% per my post.  I agree it is not an environment to be greedy.  Options may not be the best way to do things any more.

 

Uccmal, why don't you like the warrants? Since you mentioned only Leaps and the common, I assume you don't want to own the warrants. A warrants still have ~3.75 years to expiration so it gives more time to experience that very gradual improvement you were talking about and of course, same for the potential rate increases as well. Perhaps, you don't want to have that long time horizon. Not sure... Thanks.

 

Hi Tyler, I do look at the warrants.  I guess my real question is:  Knowing what we know today: Is BAC a good investment compared to other choices today?  What would you project the returns on the common and the warrants going forward 3.75 years?

 

Hi there. Good questions. For me, I see more value at BAC vs at least other banks since it is still the unloved stock even among the banks so there could be more upside because of that and the rate increase potential too of course. If you compare it to broader space there will be more attractive investments for sure but no one can analyze all the spectrum anyways. I think 20 USD TBV is very fair game for 2018 and assuming stock will not trade below TBV going forward that could give downside protection for the warrants. Upside is more sizable w/ warrants therefore warrants is a better investment to me for the patient investor. Hard to project a specific return for 3.75 years in advance but I'd think the common will trade between 20 and 30 and warrants could give you really good upside potential if that happens.

[vinod1]

Today I switched from Warrants to LEAPS as warrants cost of leverage increased to 9.25%. To me it is bit on the expensive side. $15 strike LEAPS cost of leverage is around 7%. Combine with lower investment requirement and higher strike price, it has a better risk reward.

 

Vinod

[ERICOPOLY]

Suppose they make the 12% ROTE by end of 2016 (and forever after -- although that's quite pessimistic isn't it???).

 

That's about $1.80 per share since today's TE is roughly $15 per share.

 

So it's worth $18 today at a 10x multiple less the earnings shortfall between now and then.

 

Let's say they earn only $1.20 this year and $1.50 next year.  That's a 60 cent shortfall for 2015 and a 30 cent shortfall for 2016.

 

90 cents total shortfall.

 

So it's worth $17.10 today using that basic logic.

 

I regard 12% forever after as a very pessimistic assumption.

 

[ERICOPOLY]

I think he backed down expectations to only 12% ROTE when he realized that the CCAR process makes them hold a lot more tangible equity.

 

It's the same $1.80 in earnings, but with nearly 10% more retained tangible equity the return is lower expressed as a percentage of tangible equity.

[Guest Schwab711]

Why does the asset tax go into effect? What kind of drag will that cause? I do agree that the banks are well setup for 15% returns whenever the sewer is cleared.