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Financial Stocks: Why Bank of America May Be Working Its Way to $24 Per Share


From the Buzz & Banter: An update on a trading idea for Goldman Sachs, and how the same strategy could now work for BAC.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

If you got involved in Goldman Sachs (NYSE:GS) when I highlighted (subscription required) the divergence between the stock and its CDSs, selling some near-dated out-of-the-money calls is probably not going to hurt.

If you didn't get involved and you think you missed the move, there's another very similar setup developing in Bank of America (NYSE:BAC), where its CDSs are making new post-crisis lows on a seemingly daily basis. One of the best analysts focused on relative value trades between single-name credit/credit derivatives and stock prices had a note out this morning suggesting that based on current CDS spreads, BAC should be working its way to about $24/share.

Typically, these are not fast-money-type moves, as the dynamic between CDS and stocks generally takes months to more than a year to unfold. So with that time frame in mind, and having missed his recommendations on Rite Aid (NYSE:RAD) a year ago and iStar Financial (NYSE:STAR) in December, I am now nibbling on BAC and will get longer on pullbacks.

And besides, technically speaking, this latest pennant breakout looks picture-perfect.

Twitter: @FZucchi
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Position in BAC,GS
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