Options Recap: A Huge Bearish Trade In Bank Of America

The following originally appeared on TradeStation's Market Insights Blog

The country’s No. 2 lender was met with shrugs after raising its dividend last week, and now traders are looking for the stock to remain under pressure.

Check out this giant transaction in Bank of America Corp BAC, the biggest in the entire options market on Monday:

• A block of 53,540 January 31 calls was sold for $0.90.
• At the same second, an equal number of January 35 calls was bought for $0.22.
• That translates into a net credit of $0.68.

Selling calls creates an obligation to deliver shares at a certain price, so the strategy generally reflects a belief that upside is limited. It can generate significant losses if the underlying security rallies. (See our Knowledge Center.)

There are two possible explanations of the activity, both of which are bearish/neutral. The trader might have previously sold the 35 calls when BAC was higher and profited from its slide. Or, they might have opened a new bearish call spread. Either way, they’re looking for the stock to remain below $31 through the start of next year. That’s close to a peak from March.

BAC ended the session up 0.43 percent to $28.31. Management boosted its quarterly dividend by 25 percent on June 28 after the Federal Reserve approved its financial plans. Judging by the market’s “sell the news” response, the move was expected and priced in.

The entire banking group has struggled as Wall Street increasingly worries about the flattening yield curve. That’s when profits get squeezed by shorter-term rates paid to depositors rising faster than the long-term rate paid by borrowers.

Monday’s call selling appeared two weeks before BAC’s second-quarter earnings report on July 16.

The trade pushed overall option volume in the name to about twice the average in the last month.

Bank of America with 50-day moving average and potential resistance near $31.