Bears on the Prowl Before Bank Earnings: Options Recap

Bears on the Prowl Before Bank Earnings: Options Recap

Options traders are bracing for downside as the country’s No. 2 bank prepares to report earnings.

Here’s a breakdown of a large “collar” strategy in Bank of America (BAC) yesterday:

  • A block of 31,965 August 27 puts was bought for $0.84.
  • A matching number of August 32 calls was sold for $0.52.
  • That translates into a net cost of $0.32 per contact.

Puts fix the price where an investor can sell a stock, so they make money to the downside. Selling calls generates income and forces him or her to buy shares if they rally to a certain level.

Tuesday’s investor almost certainly owns BAC equity and used the options as part of a hedging strategy. (If not, such a large “naked short” position would be incredibly risky. See our Knowledge Center for more.)

How a ‘Collar’ Works

The collar will serve as a hedge on about 3.2 million shares through the August 16. It protects against a drop below $27 while forcing the investor to exit their position in the event of a rally above $32. Between those levels, the contracts will expire worthless.

Bank of America (BAC) with select moving averages.
Bank of America (BAC) with select moving averages.

BAC fell 0.96 percent to $28.89 yesterday. It surged on strong earnings three months ago, only to get trapped at its 200-day moving average. Like other financials, it’s struggled with “flattening” yield curve. That’s when a convergence of long- and short-term interest rates makes it harder to profit from loans.

BAC announces first-quarter results next Tuesday, April 16.

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