Bet on drop in bank shares in next two years.
The January 2022 $30.00 put options on Bank of America (BAC) saw over 3,000 contracts trade against a prior open interest of 108, a 28-fold surge in volume.
With shares trading right around $30, the put option is at-the-money, can could move dollar for dollar with shares during a decline at any point before expiration in the next 851 days.
- Insurance For Your Investments? The Answer...Options
Investors are reevaluating how to do things in 2021. With Options, a stock’s price can drop to zero, but you can never lose more than the option’s premium and you know the full amount at risk right from the get-go.
Options are the most dependable form of hedge, and this also makes them safer than stocks.
A trader making this bet may be hedging a large financial position, or betting on another potential meltdown in the sector in the next two years. Bank of America shares traded as high as $55 per share in 2006, before the last financial crisis, and dropped as low as $3 in early 2009.
Action to take: Banks are likely to struggle as interest rates decline, as their profitability will likely be squeezed. While a big bank like Bank of America may make up for some of those losses on trading volume, and some are bullish as a result, a slowing economy results in slower lending, the lifeblood of banking.
We like the at-the-money nature of this January 2022 $30 put option as a hedge against a market calamity. At $5.00, or $500 per contract, it’s an inexpensive hedge against the overall market, or just the banking sector, that allows investors to hedge on the downside without having to sell their long positions.