By Jud Pyle, CFA, chief investment strategist for the Options News Network
The big story for the continuing slide in stocks is the weakness in the banking sector and the lack of confidence among investors.
Bank of America
headline a group that is rumored to be on the verge of nationalization, and the share prices reflect that fear.
At one point Friday, Citi was down over 25% and Bank of America down over 20% with the broad market
pressing the November lows in the very near future.
Two weeks ago, I wrote about
at the time and how they had a puzzling increase in option volatility. BofA had had a key reversal to set the tone for a technical rally and rallied nearly 50% in a three-day period. The stock made a run from under $4 to over $7 a share on the trading days of Feb. 5, 6 and 9.
At the time, option premiums were alerting me to a very significant price movement with the at the money straddles priced at seemingly high percentage of strike levels. I was careful to simply make an observation and not attempt to determine whether the market was out of line or not with these projections. It is time to review and evaluate what the market as a forward looking entity was saying just a few short trading days ago.
BofA was trading around $6 a share, with the straddles ballooned to 35% of the strike price. This meant that the break-evens on the trade were $3.97 on the downside, and $8.09 on the upside for the $6 straddle with only two weeks until expiration. A wide band of possible movement for sure but not an indicator if it was too expensive to buy or too cheap to sell.
The highly anticipated banking announcement, subsequently pushed back another day, from Treasury Secretary Timothy Geithner put a large scoop of uncertainty on everyone's financial plate. An absence of specifics and general poor reception to the lack of a concrete solution added to continued downward pressure. But while we thought that the straddles were high for the Geithner announcement, it was the move in these last four days that has really put the big hurt on the shares. In fact, after the Geithner announcement, February straddles came in -- only to reinflate as the shares fell.
Bank of America shares closed at $3.79 today after making new 52-week lows once again. The take away lesson is that high and low is relative and often times an emotional human measurement that clouds trading discipline. Also, it indicates that if you are a believer in efficient markets, that straddle price was not far off the mark.
Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."