Update 10/17/2022: I exited my short bear call vertical spread on BAC, 32 days before expiration, for a $1.17 debit per contract/share, a loss before fees of $37 per contract. Shares were trading at $33.43, up $1.75 from the entry level.
The Implied Volatility Rank at exit was 62.4%, down 5.4 points from the entry level.
Since this was an earnings play, I exited on the day after entry, regardless of the outcome. In this exiting came at 97.5% of maximum loss. The trade was based on expectations of a decline; the price moved in the opposite direction after earnings came in at 81 cents per share, slightly above analysts’ consensus of 94.4 cents per share.
Shares rose by 5.5% over three days (including a weekend) for a 672.1% annual rate. The options position produced a 31.6% loss for a -3,848% annual rate.
I have entered a short bear call vertical spread on BAC, using options that trade for the last time 35 days hence, on November 18. The premium is a $0.80 credit per contract share and the stock at the time of entry was priced at $31.68.
The Implied Volatility Ratio stood at 67.89%.
|BAC-bear call spread||Strike||Odds||Delta|
The premium is 80% of the width of the position’s short/long spread. The profit zone covers a 3.5% move to the upside and an unlimited move to the downside.
The risk/reward ratio is 1.5:1, with maximum risk of $120 and maximum reward of $80 per contract.
How I chose the trade. The trade was placed to coincide with BAC’s earnings announcement, before the closing bell on the day after entry. The short strike was set to coincide with the expected move of $1.05 either way, based on options pricing, which gives a price range of $30.63 to $32.73. The Zacks Investment Research earnings surprise predictor gave BAC a score of -1.76%, with a rank of 3. The analysts’ consensus is that BAC will announce earnings of $0.79 per share.
By Tim Bovee, Portland, Oregon, October 14, 2022
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.
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