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Bank of America Corp (BAC) Attracts Bearish Speculators

Are BAC shareholders picking up options protection?

by 8/22/2013 11:47 AM
Stocks quoted in this article:

The shares of Bank of America Corp (NYSE:BAC) have added 1.6% to $14.57 today, and are on pace to close atop their 10-day and 20-day moving averages for the first time since Aug. 5. From a longer-term perspective, the blue chip has advanced more than 75% over the past year, yet some option traders may be gambling on a retreat over the next few months.

So far today, BAC has seen roughly 49,000 puts change hands -- a 54% mark-up to its average intraday put volume. Most active is the January 2014 13-strike put, which has seen 10,022 contracts cross the tape at the ask price, suggesting they were bought. Plus, implied volatility is trending higher at the strike, hinting at newly purchased positions.

By buying the puts at a volume-weighted average price (VWAP) of $0.40, the traders will begin to profit if BAC breaches $12.60 (strike price minus VWAP) -- in territory explored just briefly in June -- before January options expire. Risk is limited to the initial premium paid for the puts, should BAC remain north of the strike.

Of course, considering BAC's longer-term uptrend, it's possible that the puts were purchased as portfolio protection. Specifically, the shareholders may have bought the contracts to lock in an acceptable sale price for their stake -- $13 a share -- should BAC suffer a significant decline in the intermediate term. Their longer-term goal remains for BAC to extend its ascent, though.

Whatever the motive, today's preference for puts has become par for the course for BAC. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day put/call volume ratio of 0.43 ranks in the 90th percentile of its annual range. In other words, option buyers have been snatching up BAC puts relative to calls at a much faster-than-usual clip lately.

Analysts are also skeptical when it comes to BAC, despite the security's long-term uptrend. Currently, just seven out of 23 brokerage firms consider the stock worthy of a "buy" or better rating. Should Bank of America Corp (NYSE:BAC) resume its advance, more upgrades could add contrarian fuel to the fire.

In similar fashion, short interest skyrocketed 24.3% during the most recent reporting period, and now accounts for more than 141.2 million BAC shares. Should the bears hit the exits, the stock could enjoy a boost.


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