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Since touching a two-year high of $15.03 last month, Bank of America Corp (NYSE:BAC) has surrendered nearly 6% to linger near $14.13. The equity is testing the support of its 10-week moving average, a trendline that -- along with its 20-week counterpart -- has ushered BAC roughly 73% higher during the past year. Against this backdrop, it looks like one BAC shareholder may be picking up options "insurance" to guard against an extended pullback on the charts.
So far today, BAC has seen roughly 120,000 calls and 60,000 puts change hands, compared to its average midday volume of around 74,000 calls and just 39,000 puts. Digging deeper, most of the action has transpired in symmetrical blocks at two strikes: the December 12 put and the December 16 call, both of which are out of the money.
The puts traded at the ask price of $0.22, suggesting they were bought. The calls also traded for $0.22 apiece, though on the bid side of the tape, implying they were likely sold. Considering volume has surpassed open interest at the strikes, and that most of the blocks were flagged as "opening," it appears the speculator may have implemented a no-cost collar.
In a nutshell, the protective puts lock in an acceptable price for the trader to sell his or her BAC shares -- $12 apiece, in this instance -- should the stock take a turn for the worse in the intermediate term. The covered calls were sold to erase the cost of the puts, though they put the shareholder in danger of missing out on major upside. More specifically, should BAC perforate $16 before December options expiration, the strategist could be assigned -- meaning he or she will have to unload their BAC shares at a discount to what they'd get on the Street.
From a broader sentiment standpoint, Wall Street is starting to lean bearishly toward BAC. Short interest spiked 24.3% during the most recent reporting period, and just seven out of 23 analysts offer up "buy" or better endorsements. Plus, the stock has racked up a 50-day put/call volume ratio of 0.42 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio registers in the 87th percentile of its annual range, pointing to a healthier-than-usual appetite for long puts relative to calls during the past 10 weeks.
Of course, some of that put buying -- especially at out-of-the-money strikes -- could be attributable to more options protection, considering BAC's long-term ascent. What's more, Bank of America Corp (NYSE:BAC) is set to go to court with the Justice Department on Sept. 23, regarding allegedly fraudulent and defective mortgages.