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Short-Term Option Traders Target Bank of America

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The October 14 call was by far BAC's most active strike yesterday.

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Bank of America Corp's (NYSE:BAC) options pits were slightly busier usual on Tuesday, with volume totaling about 242,000 contracts, roughly 60% of which fell on the call side. The most active option by far was the October 14 call, where nearly 41,000 contracts changed hands.

The largest block traded consisted of 12,115 October 14 calls, and went off at the bid price of $0.22 per contract, suggesting the lot was sold. Implied volatility rose on the transaction, and open interest spiked overnight, indicating the creation of fresh neutral-to-bearish bets. Under the terms of this trade, the speculator is banking on BAC -- currently perched at $13.76 -- to remain below the strike through the closing bell on October 18, when the front-month options expire. If it does, the call writer will retain the entire premium received as his profit. If instead the shares soar, the trader risks assignment -- in which case, he'll likely be on the hook to deliver the shares at $14 apiece, no matter how high they've risen.

In addition to that trade, several other large blocks (i.e., 1,000-plus contracts) of October 14 calls crossed the tape, largely at the ask price of $0.22. By assuming long call positions, these traders, in contrast to the one mentioned above, want BAC to ascend past the strike within the next week-and-a-half. Specifically, they need the shares to close above $14.22 (strike plus premium paid) by the closing bell next Friday, with additional gains to be had beyond that point. However, unlike the call seller, whose risk is theoretically unlimited, these call buyers risk losing no more than their initial cash outlay.

With the company slated to take its turn in the earnings confessional ahead of next Wednesday's open, it appears that yesterday's speculators paid a pretty penny to initiate their near-term bullish bets. BAC's one-month implied volatility at the strike currently stands at 38.9%, compared to a 20-day historical (realized) volatility of 14.6%. Likewise, the stock's Schaeffer's Volatility Index (SVI) of 37% ranks in the 68th percentile of its annual range, meaning short-term option prices are expensive right now, relative to the past year.

This article by Alex Eppstein was originally published on Schaeffer's Investment Research.

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