Big Bank Earnings Beats Embolden Large Bank Of America Option Traders

Bank of America Corp BAC shares traded higher on Tuesday but remain down slightly overall in the past six months after global economic uncertainty prompted the Federal Reserve to begin cutting interest rates. Sellers are concerned about Bank of America’s ability to maintain net interest margins as yield curves flatten.

Despite the price weakness, some large options traders are making some big bets on Bank of America ahead of the company’s earnings report expected out on Wednesday morning.

See Also: Big Banks Report Q3 Earnings; JPMorgan Leads The Pack

The Trades

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

• At 9:56 a.m., a trader bought 2,836 Bank of America put options with a $26 strike price expiring on Jan. 17, 2020 near the ask price at 50 cents. The trade represented an $141,800 bearish bet.
• At 11:23 a.m., a trader bought 1,125 Bank of America call options with a $29 strike price expiring on Oct. 25 near the ask price at $1.021. The trade represented an $114,862 bullish bet.
• At 1:05 p.m., a trader sold 4,000 Bank of America put options with a $23 strike price expiring in January 2021 at the bid price of $1.271. The two trades that took place within five minutes represented a combined $508,400 bullish bet.

Benzinga Pro reported 32 unusually large orders of Bank of America calls purchased at or near the ask or puts sold at or near the bid on Tuesday, trades typically considered bullish. There were also 20 large orders of calls sold at or near the bid and puts purchased at or near the ask, trades typically considered bearish.

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 number of large Bank of America option trades, it’s likely at least some of them represent institutional hedging.

Another Earnings Beat Ahead?

Bank of America shares traded higher after competitors JPMorgan Chase & Co. JPM, Wells Fargo & Co WFC and Citigroup Inc C all reported earnings beats. Bullish option traders are likely betting Bank of America will follow suit on Wednesday.

In addition to bullish bank earnings results, Bank of America got a major vote of confidence from Warren Buffett on Tuesday, who is reportedly seeking approval from the Federal Reserve to increase his stake in the big bank beyond the 10% threshold that triggers regulatory review.

See Also: How To Read And Trade An Options Alert

Benzinga’s Take

There were several large weekly options bets placed on Bank of America, which were most certainly plays on earnings. However, there were also plenty of longer-term bullish bets placed on Tuesday as well, including the large sale of January 2021 puts mentioned above.

These longer-term bets may be much less about Wednesday’s report and more about a bullish take on the trade war, U.S. economic expansion and a stabilizing interest rate environment.

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

Photo credit: Mike Mozart, Flickr