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Call Traders Swoop Down Upon Bank of America Corp (BAC)

Near-term call volume spikes on BAC amid lawsuit update

by 9/5/2013 11:17 AM
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Bank of America Corp (NYSE:BAC) is trending higher today, after a federal judge ruled that a current lawsuit against the banking giant cannot move forward as a class action. The news appears to have triggered a flurry of call activity, as roughly 94,000 of these contracts have switched hands so far -- almost double the norm. Conversely, around 14,000 puts have been exchanged.

Snagging the lion's share of the action are the September 15 and October 15 calls, which have seen more than 32,000 contracts cross the tape collectively -- most of them at the ask price, suggesting they were purchased. Meanwhile, implied volatility has ticked higher at both strikes, hinting at the addition of new positions. What's more, data from the International Securities Exchange (ISE) confirms the presence of buy-to-open activity.

Since the front-month calls traded at a volume-weighted average price (VWAP) of $0.11, the speculators will profit with each step BAC takes above breakeven at $15.11 (strike price plus the VWAP) between now and the close on Sept. 20. In terms of the back-month calls, the stock must climb north of $15.31 (strike price plus the VWAP of $0.31) by October expiration in order for traders to collect a profit. In both cases, the maximum loss is capped at the premium paid, should the equity fail to ascend past the $15 mark.

Also garnering notable attention is the weekly 9/6 14.50-strike call, where close to 12,900 contracts have changed hands at a VWAP of $0.08. Again, most of them crossed at the ask price, implied volatility has surged 9.2 percentage points, and ISE data shows that at least some of the volume is comprised of bought-to-open calls. In this scenario, speculators are counting on BAC to muscle north of (strike price plus the VWAP) $14.58 by tomorrow's close, when these weekly options expire. This is just a stone's throw away from the stock's present perch at $14.50.

It should be noted that Bank of America Corp (NYSE:BAC) has gained nearly 25% year-to-date -- and about 83% year-over-year -- yet short interest on the security surged by a hefty 26.9% during the past two reporting periods. In other words, some of the aforementioned out-of-the-money call activity could be the work of short sellers looking to hedge their bearish bets.

Option Briefs offer a concise look at recent notable trading activity. For more in-depth coverage of securities from an Expectational Analysis« perspective, please visit our Trading Floor Blog section.


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