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Upside call selling coincides with stock buying on the banking giant
Beth Gaston Moon is the Senior Editor for the Options News Network. Beth was a member of the research department at Schaeffer's Investment Research for more than a decade. February 3, 2010 9:25 EST Related Symbols: BAC
As Bank of America (NYSE: BAC) shares climbed 1.2% to $15.60 yesterday, call sellers took action, selling longer-term, out-of-the-money options as a moderately bearish strategy. The financial sector was under scrutiny yesterday, as Congressional leaders debated what’s been dubbed the “Volker Rule,” which would limit or outlaw proprietary trading by commercial banks. Price action was mixed from stock to stock, but the overall sector closed up more than one percent in Tuesday’s session.
On the options front, the January 2011 20-strike calls were popular, with more than 10,500 contracts trading on the day. While this pales in comparison to existing open interest of nearly 420,000, it is notable that a block of 5,000 traded in one fell swoop during mid-afternoon trading. The block traded at the bid price of 86 cents per contract. By the end of the day, the call was trading down two cents despite an increase in the underlying stock. As our Chief Investment Strategist Jud Pyle would say, “That’s a seller, folks!”
Within minutes of this block crossing the tape, a block of 150,000 shares of BAC crossed the tape. This indicates the call seller simultaneously bought shares from the option market makers. This is exactly the number of shares that would need to be sold by the market makers to make this trade “delta neutral.” (The call has a delta of 30%. 5,000 contracts times 0.30 times 100 equals 150,000 shares). So the fact that the investor did what’s called a “delta-neutral” trade could mean they are more interested in betting on volatility than direction.
The call currently has an implied volatility of 36%, compared with historical volatility for the last 10 days of 45%. So if the investor thinks BAC will continue to lose volatility, selling options with an implied volatility of 36% now will make money for the trader, assuming he is hedged daily until expiration.
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