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Option Brief: Bank of America Corp (NYSE:BAC) dropped 2.3% on Tuesday to settle at $14.73 -- its lowest close of the year -- bringing its year-to-date deficit to 5.4%. Against this backdrop, one long-term speculator is either gambling on or hedging against even steeper losses for the beleaguered banking stock over the long term.
Interestingly enough, six of yesterday's 10 most active strikes expire in January 2015. However, it was a midday spread that caught our eye. At 12:30 p.m. ET yesterday, symmetrical blocks of 16,000 contracts traded at the January 2015 12-strike put and 19-strike call. The puts crossed at the ask price of $0.29 apiece, suggesting they were bought, while the calls traded at the bid price of $0.16, implying they were likely sold. Open interest skyrocketed by more than 20,000 contracts at each strike overnight, suggesting the spread was established for a net debit of $0.13 per pair of contracts.
If the speculator is bearish, the strategy was a split-strike version of the synthetic short, which, like its name suggests, simulates a short position. Specifically, the trader will make money if BAC is sitting south of breakeven at $11.87 (put strike minus net debit) -- a new annual low -- when the LEAPS expire. The calls were sold to help fund the bearish position, and limit losses to the net debit, as long as BAC remains between the strikes through January 2015 options expiration.
If the speculator is a BAC shareholder, he established a collar on his BAC stake. The trader is a shareholder above all else, so his primary goal remains for BAC to bounce back on the charts. The collar -- which is the combination of a protective put and covered call -- is merely a low-cost way (relative to buying a put outright) to insure his shares against a drop south of $12 over the long term. Should the stock extend its retreat, the puts guarantee that the least he receive for his shares is $12 apiece, no matter how much they're worth. However, should BAC assail to new highs and topple the $19 level, the sold calls will move into the money and the trader could be assigned -- and miss out on additional upside.
As alluded to earlier, Bank of America Corp (NYSE:BAC) has struggled on the charts, and finished April beneath its 10-month moving average for the first time since July 2012. Off the charts, the company recently confessed to a major math error -- which halted its buyback program and planned dividend hike -- and will host its annual shareholder meeting this morning.