Friday, November 20, 2009

Bank of America (BAC) - Massive Butterfly Trades in Jan 2011

I saw a huge trade go up in BAC on the ticker (lower left hand side of the application). It was 100,000 Jan 2011 30 Calls. You can see the ticker snapshot below.

When I looked at the Company Tab I saw that it was in fact one leg of a butterfly. Specifically, the trade was:

Buy Jan 2011 20/30/40 Butterfly for 1.20 vs selling stock at 16.10 with 20 delta. The Company Tab snapshot is below as well as the Options Tab (click on images to enlarge).

So what does that mean? Here's the analysis on the day of expiration in January 2011:

Sell 1 million shares of stock @ 16.10
Buy 50,000 Jan 2011 20 Calls
Sell 100,000 Jan 2011 30 Calls
Buy 50,000 Jan 2011 40 Calls

Paid $6,000,000 for the options ($1.20 x 50,000 x 100)
Break Even Low: 10.10
Break Even High: 22.475
Break Even Highest: 35.025
Max Gain: $30,100,000
Max. Loss: Unlimited. At $40 loss is $29,900,000.
The bet loses an additional $1,000,000 for every dollar the stock goes above $40.

This is a bullish bet unless BAC completely collapses below $10 or rips over $35.

You can see the pay off diagram below (click on images to enlarge):

Legal Stuff:

No comments:

Post a Comment