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Options Action Recap: Fade the Rally in Bank of America, Get Long Disney

Monday, 6 Feb 2012 | 2:04 PM ET

You might be wondering why Bank of America puts are so active today, especially in the May expiry. Do options traders doubt the rally in the banks? Do they view BofA’s prospects as less than rosy?

Plausible explanations for sure, but perhaps a simpler reason exists: Friday’s Options Action.

As a bearish trade on BAC, Dan Nathanof riskreversal.com suggested buying the May 7/6 one-by-two put spread for an even nickel. Specifically, he bought the May 7-strike put for $0.40, and then sold two of the May 5-strike puts for a total of $0.35. The trade’s sweet spot is just above that $6 level, which also happens to be where one would get long in this structure if BAC fell below $6. That’s because by selling that additional put, traders in this structure are willing to get long the stock at that put’s strike price. However, with the profits made between $7 and $6, this trade wouldn’t begin to see losses below $5.05.

What’s interesting here is that just two months ago, our traders would never have suggested selling a put in a financial. But with the markets having seemingly stabilized, perhaps our guys are feeling a little bit more confident.

More interesting is the fact that this trade has been put up in size today, with the May 7- and 6-strike puts trading a respective 6,000 and 11,000 times as of noon today.

His trade and breakdown are below.

DAN’S BANK OF AMERICA TRADE

  • BUY 1 MAY 7 PUT FOR $0.40
  • SELL 2 MAY 6 PUTS FOR $0.35

HOW DAN'S TRADE MAKES MONEY

  • LOSSES ABOVE $6.95
  • PROFITS BETWEEN $6.95 - $6.00
  • GET LONG AT $6.00
  • PROFITS TRAIL OFF BETWEEN $6.00-$5.05
  • LOSSES BELOW $5.05

Our other trade involved much simpler strategy on a much simpler name: Disney . As a bullish play heading into tomorrow’s earnings, Options Action contributor Mike Khouwsuggested buying the July 40-strike call for $2.45. The stock is just 10% off its all-time high, and according to Khouw and Carter Worth of Oppenheimer, appears to be firing on all cylinders. This strategy can be used as either a simple stock replacement trade, where one sells stock and uses a portion of that sale to buy options, or just an outright bullish trade on a very well-known name. With over 1300 contracts having already traded, the Disney 40-strike calls remain the 45h most active call contract and the most active contract after March expiration.

MIKE’S DISNEY OPTIONS TRADE

  • BUY JULY 40 CALLS @ $2.45

HOW MIKE’S DISNEY TRADE MAKES MONEY

  • PROFITS ABOVE $42.45
  • LOSSES BELOW $42.25

Watch Options Actionon CNBC Fridays 5:00pm ET, Saturdays at 6a ET and on Sundays at 6a ET

Questions, comments send them to us at: optionsaction@cnbc.com

  Price   Change %Change
BAC
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DIS
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