Unusual LEAP Call Options In Bank Of America Expiring In Over 2 Years - Is BAC Stock Too Cheap?

A Barchart report today shows that an institutional investor bought a large volume of Bank of America (BAC) call options expiring in more than 27 months. This suggests strong bullish sentiment in BAC stock, likely driven by rising interest rates. (These calls are commonly known as LEAPs (long-term anticipation securities).

BAC is at $50.09 in midday trading today, down over 7% today after it released Q3 earnings before the market opened. This is well off its recent peak of $64.81 on Aug. 12.

BAC stock - last 3 months - Barchart - Oct. 14

BAC Results and Price Targets

Seeking Alpha reports that the earnings per share (EPS) of $1.08 was slightly lower (-$0.02) than expected. In addition, revenue was $662.45 million lower than expected, i.e., down 2.16%.

That could account for today's weakness. However, the stock appears to be very cheap.

For example, analysts are forecasting $4.57 in EPS this year and $5.24 next year. That puts it on forward price/earnings (P/E) multiples of 11x and 9.6x, respectively. That works out to just 10.3x on average for the next 12 months (NTM).

That is well below its 5-year average forward P/E multiple of 11.57x according to Seeking Alpha, and 10.9x according to Morningstar.

For example, using the average forward P/E of 11.2x, BAC could be worth $58.67 next year (i.e., 11.2 x $5.24).

Higher interest rates make the yield curve steeper. This benefits net interest margins (NIM) for banks like Bank of America, as long as they can reprice their loan book (i.e., roll it over) to take advantage of this steep curve.

As a result, 25 analysts surveyed by Yahoo! Finance have an average price target (PT) of $66.59, and Barchart's mean survey PT is $65.04. This implies upside of over 32% and 29%, respectively. These are expected to work out over the coming year or so.

So, no wonder investors are piling into long-dated BAC call options (i.e., LEAPs).

Unusual BAC Call Options (LEAPS) Purchase

A Barchart report today shows that the unusual LEAPs purchase was at $52.50, expiring Jan. 19, 2029, 828 days from now (i.e., 2 years and almost 3 months from now).

BAC calls expiring Jan. 19, 2029 - Barchart Unusual Stock Options Activity Report - Oct. 14, 2026

The Barchart Unusual Stock Options Activity Report shows that the call premium was $7.78 for 1,763 calls at $52.50. That volume is over 10 times the prior number of calls outstanding.

It means that the investors buying these long-term anticipation securities (i.e., LEAPs), expect to see BAC stock over $60 in 2 years (i.e., $52.50 +$7.78 = $60.28 breakeven).

Moreover, as BAC stock rises, these call options will appreciate as well due to extrinsic value. So, they may be willing to sell out before expiration and collect a profit.

Note that sellers of these calls, likely holders of BAC stock, will receive a nice yield: 15.54% (i.e., $7.78/$50.05). Over 2.2685 years, that represents an annualized yield of 6.85%, which is very attractive.

In addition, there is a slight capital gain ($52.50 / $50.5), or 3.96%, so the total potential return over the period is close to 20% (19.36%). With dividends, it is higher, given BAC's annual yield of 2.53% (i.e., $1.28/$50.5).

The bottom line is that both buyers and sellers of these LEAPs are basically bullish on BAC for the long term.

What Should Investors Do?

Should investors copy this play? There is downside risk of potentially losing 100% of your investment in buying calls. For example, if BAC does not rise to $60.28 over the next two years, the call premium will fall below the purchase price, potentially to 0.

However, these LEAPs could be a way for investors to cheaply gain exposure to BAC over the long term. It also allows plenty of time for the call purchase to work out.

Given how cheap BAC appears to be now, it could be a way to gain long-term exposure to BAC, albeit without collecting dividends, at a lower overall absolute outlay.