Bank Of America Option Trader Makes $2.6M Bet The Stock Is Headed Lower By January

Bank of America Corp BAC shares are up 23.7% in the last six months, but at least one larger option trader is betting the Bank of America rally will be running out of steam in coming weeks.

The Bank of America Trade: On Wednesday morning, Benzinga Pro subscribers received an option alert related to an unusually large Bank of America trade.

• At 11:46 a.m., a trader bought 12,500 Bank of America put options with a $30 strike price expiring on Jan. 15 at the ask price of $2.11. The trade represented a more than $2.6-million bearish bet.

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 relatively large size of Wednesday’s Bank of America option trade, it could certainly be institutional hedging.

Biden Bump: The huge put option purchase comes after Bank of America and other bank stocks have rallied big in the month of November. Bank bulls are anticipating that a steepening yield curve in 2021 could help boost net interest margins. At the same time, President-elect Joe Biden has named Janet Yellen his treasury secretary, a big relief for bank investors who were concerned Elizabeth Warren may get the job. Warren has been outspoken in her criticism of Wall Street, particularly big banks.

Benzinga’s Take: Wednesday’s big put buyer may be betting that the size or timing of another government stimulus package will disappoint the market. Or the trader may simply be anticipating a pullback in Bank of America following its recent run.

The $2.6-million put purchase has a break-even price of $27.89, suggesting 3.3% downside for the stock over the next two months.

Photo by Alex Proimos via Wikimedia.