Considering Our Options – $BAC Put Calendar

by CC July 10, 2014 1:27 pm • Commentary

A couple of weeks ago we initiated a slightly bearish play in BAC that looked to finance puts that would catch the impending Q2 earnings release (Aug regulars) with a sale of puts in the week leading up to earnings (July 11th weeklies). Here was that trade and rationale from June 27th:

TRADE: BAC ($15.36) Buy July 11th weekly /Aug 15 Put Spread for .24

-Sell to Open July 11th weekly 15 put at .08

-Buy to Open Aug regular 15 put for .32

Rationale:  I want to own what I think are dollar and vol cheap puts for the July 16th event and beyond, but I want to look to help finance the purchase of the puts as I do not see any meaningful catalysts (aside from potential market move) to move the stock up or down significantly in the time prior.  I am choosing the Aug regular puts because I would like to give the trade some time to play out even if BAC is up initially on the report.

With the stock basically unchanged from that entry the structure is slightly profitable. The puts expiring tomorrow that we sold at .08 are basically worthless and the puts we bought in August are basically unchanged. So what are we thinking as far as trade management?

The fact that the puts we are long expire in August gives us a couple of options as far as how to manage this trade. The weeklies we’re short can be closed at any time in the next two days for .01. If and when we do that we’d look to further reduce our premium costs by either rolling the calendar as a calendar or turning it into a vertical. At the moment we’re leaning towards turning it into a vertical on weakness by selling the August 14 puts and creating a put spread.

On the gap lower this morning the stock got down near its 50 day moving average of 15.23 but has since bounced with the market:

Screen Shot 2014-07-10 at 11.17.26 AM
BAC 3 month chart from LiveVol Pro

Unless we see a gap below that level tomorrow morning (in which case we’d look to see how much it could fail below) that is probably the spot to make a move. The 15 puts expiring tomorrow are zero deltas so aren’t a worry unless the market gapped down big tomorrow, the August 15 puts we’re long are about 33 deltas and the August 14 puts we’d be looking to roll to are about 12 deltas, so any weakness from here towards the 15 level means a better entry on the roll.

Stay tuned as we’ll be sure to update when we’re ready to make the move.