Today’s tickers: BAC, XRX, XLF, CAR, XLU, BIG, SLM, TTWO, MRVL & TSN

BAC - Bank of America Corp. – Investors employed two contradictory option strategies in the February contract on Bank of America today. One trader initiated a large bearish risk reversal while the other put on a bullish call spread. BAC’s shares rallied 3.5% this afternoon to $16.30. The pessimistic investor appears to have sold 30,000 in-the-money call options at the February 15 strike for 1.74 apiece in order to purchase 30,000 puts at the same strike for 84 cents each. The reversal results in a net credit of 90 cents per contract to the trader. Perhaps this individual expects shares to decline beneath the $15-level by expiration so he may retain the full 90 cent credit on the trade. Bullish trading in the same February 2010 contract suggests shares are set to rally higher in the next few months. An optimistic investor purchased 10,000 calls at the February 17 strike for 89 cents each, and sold the same number of calls at the higher February 19 strike for 34 cents apiece. The net cost of the spread amounts to 55 cents per contract. Maximum potential profits of 1.45 are available to the investor if shares increase more than 16.5% from the current price to a new 52-week high of $19.00 by expiration in February.

XRX - Xerox Corp. – One investor utilized the risk reversal strategy in order to take a long-term bullish stance on Xerox. Shares moved 1% higher this afternoon to $7.85. It looks like the trader sold 20,000 puts at the January 2011 7.5 strike for a premium of 1.15 each to partially finance the purchase of 20,000 calls at the same strike for 1.60 apiece. The net cost of the reversal amounts to 45 cents per contract. The investor profits if shares surpass the breakeven price of $7.95 within the next 12 months to expiration.

XLF - Financial Select Sector SPDR ETF – Shares of the XLF rallied 0.75% in afternoon trading to stand at $14.46. Bullish options activity on the fund suggests shares are likely to appreciate within the next several months. Optimistic investors purchased 69,000 in-the-money call options at the March 14 strike for an average premium of 1.36 per contract. XLF shares must rise 6% from the current price before profits accumulate above the breakeven point at $15.35. Shares last traded above $15.35 back on October…

It is very important to understand a company’s management strategy and management’s ability to create wealth for its shareholders. By using The Applied Finance Group’s (AFG’s) Management Quality score investors have the ability to grade management’s ability to make wealth creating decisions and eliminate wealth destroying firms from your list of constituents. AFG’s Management Quality variable is used as an exclusionary variable to get rid of companies which continue to grow their businesses when they are not profitable (generating negative Economic Margin or negative EM, which is AFG’s way of understanding a firm’s economic profitability).

When business units are unproductive and destroying wealth, management teams should not be looking to grow that business unit and concentrate on the parts of their company that have been creating wealth. Instead, the corporation needs to fix the broken parts of its business first by divesting losers and work on improving profitability to earn the right to expand. The best strategy AFG or any investor likes to see is a very profitable business (generating positive EMs) that grows its assets to maximize its profitability.