Update March 6th 20112: BAC is only a dime lower than a month ago when I put this trade on, but the spread is now worth about .07 (paid .03). With today’s move lower in the market and the under-performance of most banks, I want to look to reduce risk in this structure by taking off the ratio of this spread. With the stock at 7.71, I want to buy back one of the May 6 Puts for .11 ( I sold them at .19) as the delta on those are a bout .10. So I am now increasing the cost of my spread, but I have defined my risk to the .14 in premium I have now paid for the $1.00 wide spread.
I obviously have no clue whether this move continues but if stocks like MS, GS and C start moving 4-5% again, this will likely not be a good sign for the market and I do not want to be naked short downside puts in a space that has the potential to re-trace a large portion of it’s ytd to date performance.
SO to be clear, my new position is LONG BAC MAY 7/6 Put Spread for .14. that is my max risk.
Original Post Feb 3rd, 2012: BAC That Spread Up
Here is a little Preview of what I will be discussing on Options Action tonight at 5pm on CNBC:
BAC ($7.80) Stock is up 40% ytd and 60% from the 52 week lows made in DEC. While the stock may have been severely oversold heading into the new year, it might have gotten a little ahead of itself in the near term and a re-tracement of a portion of the recent move could be in the cards in the months to come.
Here is a relatively low risk way to play for a pull back in the shares btwn now and May expiration, with the worst possible scenario that you are Put the stock at $6.00 (really $5.03 when you include the gains of the spread as if it was 1 up), that is down 35%!
TRADE: BAC ($7.80) Bought May 7 / 6 1×2 Put Spread for .03
-Bought 1 May 7 Put for .41
-Sold 2 May 6 Puts for a total of .38
Break-Even May Expiration:
Profits btwn 6.97 and 6.00 make up to .97, profits trail off btwn 6.00 and 5.03
Losses of .03 above 7.00 and up to .03 btwn 6.97 and 7.00……
MAX RISK, if stock is 6.00 or lower you are Put the stock, but you have made .97 so effectively you are protected to 5.03, SO YOU WOULD ESSENTIALLY BE LONG THE STOCK AT 5.03 (down 35% from current levels)
TRADE RATIONALE: The company clearly seems to be “out of the woods” so to speak, but don’t think for a second that if we get a re-emergence of debt fears in Europe, that investors won’t hit the pause button in U.S. banks that have enjoyed fabulous gains over the last 6 weeks.
I want to reiterate that I have no strong negative fundamental view on BAC, This is merely a low premium way to get exposure to a move lower, that offers a very wide point in which you would lose real money on this trade. I LIKE THE RISK REWARD.
Think of it as a put spread with an equal number of short puts added.
So keep that in mind on trades like this. If one didn’t want to own 10k shares of BAC at 5.03, one doesn’t do this trade 100 times. Because it’s possible that’s what would happen in the worst case scenario.
If you wouldn’t be that stoked to be owning this stock at 5.03 because of what that would entail (bank stock craziness!) the sizing of your trade has to take that into account.