Unusual Option Activity: Bank of America (BAC)

Wall Street megabank Bank of America (BAC) recently reported earnings. The market didn’t care too much for them, and one trader is now betting that shares will trend lower in the coming weeks.

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  • That’s based on the February 9 $31 puts. With 22 days until expiration, 11,249 contracts traded compared to a prior open interest of 178, for a 63-fold rise in volume on the trade. The buyer of the puts paid $0.18 to make the bearish bet.

    Bank of America recently traded for just under $33, so shares would need to drop about $2, or about 6 percent, for the option to move in-the-money. The strike price is well over the stock’s 52-week low of $24.96.

    Rising interest rates and reduced borrowing and lending activity has led to earnings sliding by 55 percent over the past year. Revenues are also down just over 10 percent.

    In terms of valuation, shares trade at about 10 times forward earnings and for the bank’s book value. Plus, BAC pays a 2.9 percent dividend yield.

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  • Action to take: Shares are fairly valued at current prices, but are now in a downtrend.

    A continued small decline in the coming weeks to follow up to the latest earnings report is likely. Interested investors should look to buy shares on a drop to the low $30s.

    For traders, the February 9 $31 puts are an inexpensive put option that could lead to triple-digit returns on a quick slide in shares in the coming weeks.