Bank of America Corporation (NYSE: BAC) has been the worst performer this year in the financial sector, or at least of all the large money center banks.  The reasons are more on fears but the fears have been creating some actual reactions with dire consequences.  And suddenly, Senator Dodd’s comments about not nationalizing Bank of America and the possibility of loosening or tweaking the mark-to-market rules have offered some stability.  Shares are back up to flat today and we have seen more than 500 million shares trade hands.

Traders have been pounding Bank of America.  The rumor mill has the
N-WORD all over it… nationalization.  Other talk is on the fate of
its books in a post-Merrill acquisition and mark to market rules.  But
it goes on and on in rumors and fears. This stock closed at $14.08 on December 31, 2008.  It no longer matters that Bank of America was at $38.15 on a dividend adjusted close at the end of 2007.  But shares are now under $5.00.

Where this gets more interesting is in the activity seen in call
options.  Here we broke down teh call option activity by Strike price,
contract volume, and the prior open interest.  These were the levels seen at 1:57 PM EST:

FEB    Volume    Op.Int.
$4.00    45,904    9,322
$5.00    50,988    25,521
$6.00    106,391  49,509
$7.50    70,694    108,266
$9.00    17,273    71,857
$10.00   20,307   76,449

MAR    Volume  Op.Int.
$3.00    8,160    1,151
$4.00    7,431    1,217
$5.00    11,450   8,647
$6.00    12,097   16,210
$7.00    16,927   23,653
$8.00    16,239    61,077

Even in low-priced stocks and even with shares this active, it is very rare to see options volume this active.  As options are representative of 100 shares per 1 contract, this is
representative of another 40 million shares worth of trading bets.
That is also just on the two front months of February and March. This recovery and this huge options and stock volume may be a capitulation point.  Everyone has been saying this has been trading as though it was going to be absorbed by Uncle Sam in a nationalization.  It seems that traders are finally taking the bet against nationalization.  At least for today.

Jon C. Ogg
February 5, 2009