Traders Think Mega Bank Is Boxed In: Options Recap

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businessman in suit with claustrophobia inside a box

The country’s No. 2 lender was met with shrugs after raising its dividend last week, and now traders are looking for the stock to remain under pressure.

Check out this giant transaction in Bank of America (BAC), the biggest in the entire options market yesterday:

  • A block of 53,540 January 31 calls was sold for $0.90.
  • At the same second, an equal number of January 35 calls was bought for $0.22.
  • That translates into a net credit of $0.68.

Selling calls creates an obligation to deliver shares at a certain price, so the strategy generally reflects a belief that upside is limited. It can generate significant losses if the underlying security rallies. (See our Knowledge Center.)

There are two possible explanations of the activity, both of which are bearish/neutral. The trader might have previously sold the 35 calls when BAC was higher and profited from its slide. Or, they might have opened a new bearish call spread. Either way, they’re looking for the stock to remain below $31 through the start of next year. That’s close to a peak from March.

BAC ended the session up 0.43 percent to $28.31. Management boosted its quarterly dividend by 25 percent on June 28 after the Federal Reserve approved its financial plans. Judging by the market’s “sell the news” response, the move was expected and priced in.

The entire banking group has struggled as Wall Street increasingly worries about the flattening yield curve. That’s when profits get squeezed by shorter-term rates paid to depositors rising faster than long-term rate paid by borrowers.

Monday’s call selling appeared two weeks before BAC’s second-quarter earnings report on July 16.

The trade pushed overall option volume in the name to about twice the average in the last month.

Bank of America (BAC) with 50-day moving average and potential resistance near $31.
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.