Sarah Wasserman (swasserman@sir-inc.com) Option activity soared to double the norm on Bank of America Corporation (BAC) on Friday, with volume of 623,000 contracts crossing the tape. What's more, traders showed a near-equal preference for calls and puts. Upon closer inspection, it appears that a significant portion of Friday's volume was linked to one particular spread.
Late Friday afternoon, 100,000 November 12 puts, marked "spread," traded at the ask price, while 100,000 November 15 calls, also marked "spread," changed hands at the bid price. Open interest at each strike swelled by roughly 100,000 contracts over the weekend, confirming the initiation of a collar on BAC.
A collar is essentially the combination of a protective put and covered call, and is generally initiated by a shareholder who is bullish on the stock -- but also slightly nervous. However, by purchasing BAC's November 12 put and selling an equivalent number of November 15 calls, the trader has effectively locked in a pair of acceptable exit prices on his BAC shares.
Technically speaking, BAC has been trapped in a trading range between $12.50 and $14 since the beginning of August. In fact, for the past several weeks, BAC has been trading right at the $13 level.
At last check, BAC was hovering around $13.17.
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