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Trader Foresees Volatility for Bank of America Corp (BAC)

The headline trade in BAC's options pits Monday was an enormous long strangle

by 9/17/2013 11:23 AM
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According to results announced yesterday, Bank of America Corp's (NYSE:BAC) mid-cycle stress test affirmed the bank's ability to continue operations even under a sharp economic downturn. Despite the positive news, the shares sank slightly, and are only marginally higher this morning at $14.55. Elsewhere, in Monday's options pits, one trader bet on intermediate-term volatility by targeting BAC's November 16 call and November 13 put.

At the former strike, a single investor bought 19,900 contracts at the ask price of $0.15, while at the latter, he picked up another 19,900-lot at the ask price of $0.12. Open interest at both strikes spiked by north of 20,000 positions overnight, suggesting yesterday's trader simultaneously entered into long call and long put positions for a total net debit of $0.27 per pair of contracts, creating what's known as a long strangle.

What this means is that the speculator anticipates Bank of America will make a big move -- though he's not sure about the direction it will take. The breakeven points for the two-legged trade are $16.27 (call strike plus the total net debit) and $12.73 (put strike less the total net debit). Should the shares move above or fall below those respective marks, the trader will begin to profit. If, however, the stock churns between $13 and $16 through November options expiration, the most the bettor can lose is the initial premium paid.

It bears keeping in mind that Bank of America Corp (NYSE:BAC) is scheduled to report third-quarter earnings on Oct. 16, prior to the opening bell. Historically, the shares have been highly affected by such events. BAC's earnings miss in April led the stock to slide over 5% in the ensuing three sessions, while its earnings beat in July resulted in a gain of nearly 6% during the same length of time. The breakeven levels for yesterday's strangle trade now rest 12.5% below and 11.8% above the current price.

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