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The $2.5 Million Bet On Bank of America Corp (BAC)

Bank of America Corp's September calls and puts were used to initiate a long straddle

by 5/23/2014 10:08 AM
Stocks quoted in this article:

Option Brief: Longer-term traders hit Bank of America Corp's (NYSE:BAC) options pits on Thursday, as evidenced by the equity's 30-day at-the-money implied volatility, which fell 3.5% on the day to close at 18.7%. One trader in particular targeted BAC's September series in hopes of capitalizing on a volatile move for the financial firm -- regardless of direction -- over the next four months.

Specifically, the two largest blocks traded on BAC yesterday were a pair of 16,500-contract lots of September 15 puts and calls. According to Trade-Alert, the blocks were simultaneously bought at ask prices of $0.91 and $0.59, respectively, resulting in an initial net debit of $1.50 per pair of contracts. Meanwhile, open interest at both strikes soared overnight, confirming the addition of new positions.

By initiating the long straddle, the trader will begin to profit on a move north of $16.50 (strike plus net credit) or south of $13.50 (strike less net debit). Gains are theoretically unlimited to the upside, and can be quite significant to the downside (should BAC hypothetically tumble all the way to zero by expiration). The maximum loss -- should BAC close right at $15 when the options expire -- is 100% of the premium paid, or roughly $2.5 million (16,500 pairs of contracts * $1.50 net debit * 100 shares per contract).

On the charts, Bank of America Corp (NYSE:BAC) has been making a steady trek lower in recent months, with the shares off nearly 19% from their three-year peak of $18.03, tagged in late March. What's more, the stock has underperformed the broader S&P 500 Index (SPX) by more than 15 percentage points over the past 40 sessions. The equity is continuing its downtrend in today's session -- off 0.3% to trade at $14.67 -- as traders continue to digest reports that the Securities and Exchange Commission (SEC) is investigating Merrill Lynch -- a division of BAC -- over potential money laundering.

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