Option Traders Betting Against Bank Of America Following Trump Tariff Comments

Shares of Bank of America Corp BAC are up 32.3% in 2019 as big U.S. banks are generating record profits despite three Federal Reserve interest rate cuts.

For the second day in a row, however, some large option traders are buying big bank puts.

The Trades

On Tuesday, Benzinga Pro subscribers received 24 option alerts related to unusually large trades of Bank of America options. Here are some of the largest:

• At 8.37 a.m., a trader bought 25,300 Bank of America put options with a $32 strike price expiring on Dec. 27 above the ask price at 54.2 cents. The trade represented a $1.37 million bearish bet.
• At 8:41 a.m., a trader sold 15,000 Bank of America call options with a $33 strike price expiring on Dec. 20 at the bid price of 50 cents. The trade represented a $750,000 bearish bet.
• From 8:55 a.m. to 8:57 a.m., a trader bought 13,325 Bank of America put options with a $32 strike price expiring on Dec. 27 near ask price ranging from 57.1 cents to 58 cents. The series of five trades represented a more than $760,857 bearish bet..
• At 9:13 a.m., a trader bought 500 Bank of America call options with a $27 strike price expiring on Jan. 17 at the ask price of $5.701. The trade represented an $285,050 bullish bet.

Of the 24 large Bank of America option trades on Tuesday, eight were either calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Fifteen trades were either calls sold at or near the bid, or puts purchased at or near the ask, trades typically seen as bearish. On trade was executed at the neutral midpoint of the spread.

The three largest Bank of America option trades on Tuesday represented a combined bearish bet of more than $2.88 million. The largest trade of Dec. 27 put options has a break-even price of below $31.46, suggesting more than 3.5% downside for Bank of America shares in less than a month.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the large size of the largest Bank of America trades, they could potentially be institutional hedges.

Disappointing Jobs Number Ahead?

Stocks traded lower on Tuesday after new comments from President Trump suggested the White House is prepared to move forward with another round of trade war tariffs on China on Dec. 15 if a trade deal is not reached in the next couple of weeks. However, large option traders were betting against JPMorgan Chase & Co. JPM on Monday prior to Trump’s comments.

The four primary near-term catalysts for U.S. bank stocks are fourth-quarter earnings in January, trade war updates, Federal Reserve actions and U.S. economic numbers.

Given the three largest Bank of America option trades on Tuesday involve contracts that expire before the end of December, they don’t appear to be a play on earnings. At the same time, recent Fed commentary indicates the committee is content with current monetary policy measures unless economic data changes in a significant way.

Benzinga’s Take

Traders seem to be anticipating worse-than-expected jobs numbers from the Labor Department on Friday morning and/or more trade tariffs on Dec. 15. Traders should watch to see if the bearish option trading activity in big U.S. banks continues through the rest of the week.

Bank of America's stock traded around $32.68 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

Option Traders Buying JPMorgan Puts Ahead Of November Jobs Report

How To Read And Trade An Options Alert

Photo credit: Mike Mozart, Flickr