Bank of America (NYSE: BAC) sees long-term put buyers

Investors expect future downside in Bank of America (NYSE: BAC), and expressed this outlook on Tuesday by stocking up on in-the-money puts in the January 2012 series.

Since early August, BAC shares have been consolidating sideways, bouncing between the 14 and the 18 levels. Yesterday, the stock closed down one cent, a whopping 0.07%, at $14.47. This modest move came despite news that Standard & Poor’s revised its outlook on the banking giant to “negative” from “stable.”

Meanwhile, more than 7,600 contracts changed hands at the January 2012 20-strike put. The lion’s share of this volume translated into new open interest, which rose to 17,597 from 10,086. Shortly before 11:00 AM Eastern Time on Tuesday, two blocks of 3,750 contracts traded near the ask price, changing hands at an average price of $6.925 per contract. In total, nearly $5.2 million worth of premium allocated throughout these two block trades.

If these put buyers plan on holding onto these LEAPS puts through expiration in nearly two years, they would need BAC shares to be trading below $13.075 in order to break even (this is the strike price minus the premium paid). The more likely scenario, however, is that the investors are waiting for a pullback in BAC or a pop in implied volatility to lift the value of these puts, allowing them to sell them to close at a profit.

The maximum profit for a long put is theoretically unlimited as low as the zero mark (as a stock cannot trade below zero). The maximum loss is simply 100% of the premium paid, or in this case $6.925 per contract.

By opening a free virtual trading account with OptionsHouse, you can build a profit/loss diagram to help visualize the risk/reward dynamics of this trade.

More on BAC:

S&P cuts outlook on Citigroup, Bank of America

Option traders sell a long-term spread in Bank of America (NYSE: BAC)

Traders keep “delta neutral” in Bank of America (NYSE: BAC)