A Big Bank Trade Moving Into Earnings

Options, Payments Industry, Technical Analysis

As an options trader, earnings season is often one of the most enjoyable times to trade. During the heavy earnings periods, you often see plenty of large moves in individual stocks (for obvious reasons). Options can be a good way to capitalize off those big moves.

However, the biggest challenge with using options for earnings is big moves tend to be built into the options prices. To make money buying options on earnings plays, you need a big earnings surprise and for traders/investors to act in a timely manner on that surprise. At times, it doesn’t work out as well as hoped.

Conversely, sometimes the best time to use options to bet on a big move is when it’s least expected. That’s when you can frequently get a good deal on options prices.

I personally like to find cheap straddles on stocks which I think could move (but aren’t necessarily near an earnings period). A straddle is when you buy a call and a put at the same strike during the same expiration period. They are typically bought at-the-money or very near the current stock price of the underlying.

Here’s the deal…

Just a few days ago, a trader executed a trade in Bank of America (NYSE: BAC) which can make really good money if the stock makes a big move by mid-April. The trade was an at-the-money straddle, like I just described.

More specifically, the trader bought about 450 April BAC 32 straddles, with the stock at $32, for $2.75 per straddle. Breakeven points for this are $29.25 and $34.75. With a straddle, upside gains are basically unlimited as long as the stock keeps moving (although the stock price obviously can’t go below zero). It cost roughly $125,000 to make the trade (which is also max loss potential).

So, why do a straddle instead of picking a direction?

On one hand, bank stocks have done well in general in recent weeks due to higher interest rate expectations. But, BAC has also been at the front of investing in blockchain. The bank could be one of the first major money centers to fully incorporate blockchain into their systems – something that definitely makes the tech crowd happy.

On the other hand, the stock has also run up a lot already. The interest rate benefits are likely built into the price, and who knows what impact blockchain tech will have on the industry. Plus, if investors move out of financials, BAC could give back gains in a hurry.

Given the two scenarios, it’s easy to see why the straddle is such a good trade. It’s very plausible to expect the stock to move $2.75 in either direction between now and April. That’s a long time in terms of the stock market.

If you buy into this thesis, I’d recommend this exact same straddle. It’s relatively cheap, has unlimited upside, defined risk, and you don’t have to pick a direction. It also provides the buyer enough time to let the thesis play out one way or another.

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