BAC is popular among the computerized trading models because it has a low price, high volume and high volatility. These factors make it a good find among option traders as well, as they look for liquid opportunities that will make quick moves in the expected direction.
It’s the “expected direction” part that has been a bit of a challenge.
Click to EnlargeCheck out the accompanying chart: Since the beginning of February, BAC has not committed to a trend; the stock has bounced back and forth between $7.75 and $8.25. And while a 50-cent range is a drop in the bucket for Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG), it is a 6.3% move in an $8 stock. Daily changes of 2%, 3% or even 5% in the stock are enough to whipsaw short-term option traders right into negative territory (and out of their positions).
During Wednesday’s session, BAC was — as is generally the case — one of the option volume leaders in the market. Overall, almost 330,000 option contracts traded during the day, at 196,000 calls and 133,000 puts. (Oddly enough, this was the lowest option volume seen in BAC in the past 10 sessions).
More than 78,000 of these calls traded at the April 8 strike. This option came into the session in-the-money (BAC opened at $8.06) but finished the session out-of-the-money by a nickel, with the shares trading at $7.95.
Open interest at the strike was close to 180,000 on Wednesday but is just under 90,000 this morning, suggesting yesterday’s volume was on the closing side of the transaction.
It appears as though these options were sold for an average premium of 57 cents per share, so it could be that traders were bailing out of long call positions amid the stock’s downward shift.
Long call traders risk 100% of the premium paid in exchange for the potential of unlimited upside. The breakeven level is the strike price ($8) plus the premium spent (let’s call it 70 cents for the sake of this example).
So BAC would need to be trading above $8.70 when April options expire for these long calls to be profitable. This certainly is not outside of the realm of possibility, but perhaps some traders are opting to take their money off the table and find a less nerve-wracking opportunity.
Computers like BAC shares because it is so very unpredictable. But this same factor is why retail investors aren’t having much luck, at least as far as shorter-term options trades are concerned.
Just another reason why everyone hates Bank of America.
As of this writing, Beth Moon did not hold a position in any of the aforementioned securities.