Trader Banks on a Bank of America Bounce
It's been a bumpy road for Bank of America lately, but one option trader sees smooth sailing ahead.
Bank of America has dropped for the past 6 days in a row, even as the Dow surged over 100 points on Tuesday. The reason: a unanimous vote in the Senate on Saturday to end subsidies based on the size of banks.
Basically, it was a bill that said that America's six largest banks should pay more, not less, for being big. The biggest banks would now have to pay a surcharge, in the form of additional capital as a percentage of their risk-weighted assets, on top of already-stricter capital controls.
(Read More: Senate Wages Fresh War Against Big Banks)
Nevertheless, Wednesday morning, one option trader bet that the stock's slump is over, when he sold 3000 of the 12.5-strike puts expiring next Friday for $0.34.
This is a bullish trade that reflects an expectation that BAC will rise above $12.50 by next Friday, April 5. If the stock is above the put's strike price, then the option will expire worthless, and the trader will get to keep the entire premium collected. If BAC is below $12.50, then the trader will be forced to buy the stock at $12.50. But since the trader still gets to keep the $0.34 premium, the effective cost basis of the stock would be $12.16.
Therefore, this trade shows that the trader is near-term bullish on the stock and willing to step in as a buyer at 12.16 to play the stock's apparently oversold conditions.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."