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Bank of America Corp (NYSE:BAC) is little changed this afternoon, following news that the financial institution reached a $772 million settlement with U.S. regulators, related to dishonest credit card practices. Meanwhile, in the options pits, BAC call volume today outnumbers put volume by a roughly three-fold margin.
Most active is the weekly 4/25 17-strike call, where nearly 32,700 contracts have changed hands. The biggest single transaction at this strike involved an 18,598-contract lot that traded off the bid price, suggesting it was sold. Implied volatility increased here, and volume outstrips open interest, making it safe to assume the contracts were written to open. This call seller hopes that BAC shares remain below $17 through the close on Friday, April 25, when the weekly options expire. If that happens, the trader will retain the entirety of the initial premium collected.
Also crossing the tape at the aforementioned strike were a pair of large sweeps, consisting of 7,000 and 4,402 contracts, respectively. These blocks traded at the ask price, and data from the International Securities Exchange (ISE) confirms significant buy-to-open activity. In other words, unlike the call seller mentioned earlier, these speculators are hoping for Bank of America shares -- currently resting at $16.44 -- to make their way beyond $17 by options expiration.
In terms of risk, the call buyers have much less at stake than the call writer. Specifically, the buyers have put only the initial premium paid on the line, while the seller's potential risk is theoretically unlimited, as his losses will mount with each step north of $17 the underlying takes. However, if these were covered calls written by a BAC shareholder, a rally north of $17 will result in the loss of only the premium collected (as well as any additional upside in the shares beyond that strike price).
Shifting our attention from short-term BAC options to long-term, the stock's January 2015 17 strike is also attracting attention today. Shortly before noon ET, two blocks of 10,000 contracts each changed hands on the January 17 put and call, suggesting the possible initiation of a short straddle.
Outside of the options pits, Bank of America Corp (NYSE:BAC) will step into the earnings spotlight next Wednesday morning. The firm has exceeded expectations in each of the last three quarters, for an average gain of nearly 4% in the subsequent week. Should BAC again top the Street's bottom-line consensus view, the shares could add to their already impressive year-over-year gain of more than 34%.