Friday, August 12, 2011

Trade of the Day: Bank of America (BAC) February 2012 $12/$14 ratio call spread

The Trade
Trader executed the February 2012 $12/$14 ratio call spread 20,000x for a $.05 debit, $100,000 total. Maximum risk is unlimited, equal to going short at $16. Maximum profit potential is limited at $14 to $3,900,000.

Analyzed solely based on direction, the trade is clearly bullish. However, the real premise behind the trade is that it favors a decrease in implied volatility. This trade looks to see current implied volatility levels of roughly 56% to decrease somewhere near historical levels in the low 30% range. The trade is also positive theta, meaning that it profits from premium time decay.

The graph below shows the profit potential of the trade assuming implied volatility decreases to 31%.

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No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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