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Bank of America Shareholder Locks In Gains

One BAC bull used puts and calls to 'collar' the blue chip

by 1/2/2013 11:29 AM
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Option traders are making a beeline for Bank of America Corp (NYSE:BAC - 11.92) this morning, with both calls and puts flying off the shelves. At last check, the blue chip has already seen roughly 312,000 calls and 102,000 puts change hands -- nearly three times its average intraday volume. Digging deeper into the data, it looks like one BAC shareholder is employing both calls and puts to implement options "insurance" on the uptrending stock.

Specifically, symmetrical blocks of 10,000 contracts traded at the out-of-the-money April 10 put and April 14 call. The puts crossed at the ask price of $0.27, implying they were likely bought, while the calls crossed at the bid price of $0.28, suggesting they were sold. According to Trade-Alert, both blocks were flagged as "opening," indicating the speculator established a collar for a net credit of $0.01 per pair of options.

In a nutshell, the trader is protecting his or her shares of BAC in case of an intermediate-term pullback. Buy purchasing the protective puts, the investor locked in a sale price of $10 for their BAC shares, should the stock fall into single digits before April options expire. Meanwhile, the sale of the covered calls funded the protective put positions, and generated a credit on the play -- which the shareholder can keep, as long as BAC remains south of $14 through the options' lifetime. However, should BAC surmount the $14 level, the calls will move into the money, meaning the shareholder could be assigned and miss out on additional upside.

After touching a fresh multi-year high of $12.15 out of the gate, the shares of BAC were last seen 2.7% higher in the $11.92 neighborhood. Along with the fiscal-cliff deal, the stock is being bolstered by a bullish brokerage note, with Evercore adding BAC to its conviction list and naming it the top pick among large-cap banks for 2013. The analysts are in the optimistic minority, though. Despite outperforming the S&P 500 Index (SPX) by nearly 30 percentage points during the past three months, BAC has earned just nine "buy" or better ratings, compared to 17 "hold" or worse suggestions.


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