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.
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.
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.