Riding a megabank on the cheap: Options recap


One big investor is riding a megabank on the cheap, thanks to the leveraging power of options.

Bank of America (BAC) has been on the move since late 2016. A large call roll yesterday seemed to show that a money manager is using options as a surrogate for owning roughly 2.25 million shares in the financial giant:

  • A block of 22,500 January 15 calls were sold for $15.70.  These contracts expire at the start of next year.
  • A bock of 22,500 January 2020 20 calls was bought for $11.25 in a new opening trade. These contracts expire a year later.

Calls fix the price where a security can be purchased, so they tend to appreciate when a stock rallies. It looks like Thursday’s trader owned the 15 calls and had made money from BAC’s longer-term uptrend. He or she then sold those contracts and rolled their position into the 20s.

Making the adjustment let them collect a credit of $4.45, and gives them an additional year of upside exposure. Will they repeat the transaction in the future to take more profits if BAC keeps running? Maybe.

Bank of America (BAC) with 50- and 200-day moving averages.

The strategy is noteworthy because it used deep-in-the-money options with a very high delta. That essentially lets them chop off the lower two-thirds off the stock price. That, in turn, means less capital is at risk. And that, in turn, creates the potential for more leverage on a percentage basis. (Of course, they can still lose money if the shares decline. See our Knowledge Center for more.)

BAC rose 1.38 percent to $30.72 yesterday. The call roll was the single largest options transaction for any equity in the market yesterday. Calls outnumbered puts in the name by more than 4 to 1.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.