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Breaking Down the Big Bullish Bet on Bank of America Corp (BAC)

Bank of America Corp was singled out for a notable call purchase on Tuesday

by 5/21/2014 9:40 AM
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Option Brief: Bank of America Corp (NYSE:BAC) is trading near year-to-date low territory at $14.66, and has shed 18.7% since touching a multi-year high of $18.03 on March 21. Nevertheless, options traders remain optimistic -- especially about the stock's short-term trajectory -- with one speculator yesterday placing a big bullish bet.

Specifically, a block of 20,000 weekly 5/23 15-strike calls changed hands, pushing implied volatility up 6.3 percentage points at the strike. The contracts crossed at the ask price of $0.02 apiece, and open interest skyrocketed at the strike overnight, underscoring our theory of a newly bought block of calls.

The buyer will make money if BAC settles north of $15.02 (strike plus premium paid) at Friday's close, when the weekly options expire. In fact, profit potential is theoretically unlimited north of this breakeven point. Risk, meanwhile, is limited to the initial net debit of $40,000 (premium paid x 100 shares per contract x number of contracts), should BAC remain south of $15 through the end of the week. Delta on the call stands at 0.093, implying a less than 10% chance of an in-the-money finish at expiration.

Now is as good a time as any to speculate with BAC's short-term options. The stock's Schaeffer's Volatility Index (SVI) of 20% stands in the bottom quartile of its annual range, suggesting the equity's front-month contracts are attractively priced right now, from a historical standpoint.

As alluded to earlier, Bank of America Corp (NYSE:BAC) has struggled on the charts of late, underperforming the S&P 500 Index (SPX) by about 16 percentage points during the past two months. Ushering the stock lower have been its 10-day and 20-day moving averages, the former of which could stifle any attempts to topple the aforementioned 15 strike in the near term.

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