Four down, two to go. As I said a couple of weeks ago in my Market Commentary (see Bank Bashing), I thought that Bank of Montreal (symbol BMO) and CIBC (symbol CM) were the most likely candidates to bounce from recent lows. If… their earnings surprised to the upside.

BMO did not disappoint. Earnings were well off year ago levels, but better than analysts had expected. Most importantly, BMO talked positively about 2008, and did not cut their dividend. The stock was trading below $56 per share when I last posted. On Friday it closed at $63.44.

Next up… CM. My guess is that CM has about the same exposure as Royal Bank (symbol RY). But unlike RY, where the market was unsure, I think the market believes CM has significant exposure. Anything less should be positive for the stock. Much as it was for BMO. CM closed last Friday at $88.85, and reports on December 6th.

Bank of Nova Scotia (symbol BNS, recent price $52.85) also reports on December 6th. I suspect BNS has minimal if any, exposure to the US credit crunch. Moreover, I suspect, BNS will report strong earnings growth from their Latin America strategy.

How much of an impact that has on the stocks’ price will depend on how much earnings growth has already be factored in. Personally, I think it will need to be a very strong quarter is there is to be significant lift in the stock price. Much we saw last week with Toronto Dominion, who reported a blow out quarter.

In terms of strategy selection, it is hard to recommend buying calls on CM. What with the CM near term at-the-money options trading with implied volatilities in the 40% range. The CM December 90 calls, for example are trading at $2.90 which is an implied volatility of 39.93%. On the other hand, if CM provides a real surprise, than $100 per share is probably in reach. Probably sooner than later.

However, it is important that you understand what the high implied volatility is really telling us. One way to look at this is to translate implied volatility into a so-called implied trading range. To put some meat on this bone, suppose you purchased the CM Dec 90 straddle (the Dec 90 call at $2.90 and the CM Dec 90 put at $3.55). Total cost for the straddle is $6.45 per share.

Now take the $6.45 and add it to the $90 strike price. Using that methodology, the upside target as implied by the options market is $96.45. Similarly, take the $6.45 and subtract it from the $90 strike, which gives us a downside target of $83.55.

This information is essentially providing us with an implied trading range for CM from now until the December 22nd expiration date. Which is to say, the options market has roughly defined that the normal trading range for CM around the $90 strike price over the next three weeks, is between $83.55 and $96.45.

If you think that CM could breech either end of that trading range, then you are saying that you think the options on CM are understating the potential volatility based on the December 6th earnings announcement. If that is your view, and you think CM will surprise to the upside, then by all means buy calls. Of course, if you expect earnings to be less than expected, buy puts.

If you believe that neither end of that trading range is likely to be breeched before expiration, then consider writing CM covered calls on cash secured naked puts. A bullish strategy for traders who think CM will surprise to the upside.

On the other hand, if you think that CM will disappoint and believe the December options are overstating volatility then theoretically, you would write uncovered calls. However, from a practice management point of view, I never write uncovered calls. I simply think the risk is too high (the risk of uncovered call writing is theoretically unlimited) relative to any potential reward.