WFC Unusual Option Activity Report
You wouldn’t typically be thinking bullish thoughts as a company like Wells Fargo & Co (NYSE: WFC) falls 2.75% and is testing its 52-week low. However, these are not exactly normal times and WFC has been a significant underperformer within the banking space. The unique position that it finds itself in is intriguing and bullish option traders are willing to take a long shot.
WFC Top Stories
Wells Fargo is in a difficult position as one of the more poorly run banks, but it is still one of a handful of banks with direct access to the Federal Reserve. The company was recently forced by the Fed to cut their quarterly dividend from $0.51 to $0.10. That dynamic forces the bank into a position of having to better their earnings.
In order to cut costs, the bank has been exploring several measures to increase profitability. One idea was to eliminate 401 (k) matches, but that one was scrapped. They’re also looking at cutting perks for high-earnings employees and potentially sell their asset management business.
The desire to become leaner could be a catalyst if they can turn the corner.
WFC Option Activity
On Monday, the option stats for Wells Fargo were about average. Looking at the option fill prices for the company doesn’t paint a bullish picture as 52% of the put volume filled at the ask and 49% of the call option volume filled at the bid. However, these are cursory statistics that require a little more digging.
A quick view of Monday’s time and sales revealed a rather large bullish trade filled in one print. Here’s the details:
- 15,000 21 JAN 22 $32.50 call BOT @ $1.24 against an open interest of 11,274
- 15,000 21 JAN 22 $42.50 call sold @ $0.43 against an open interest of 20,284
This is a long call vertical trade for the 2022 expiration. The fact that the volume on the $42.50 call sold is below the open interest could make it a closing trade. In that case it would be a rolling trade from $42.50 to $32.50. Either way it is a bullish trade.
The expiration selection doesn’t provide an immediate catalyst for price appreciation, but it is an acknowledgement of the oversold nature of WFC. The trade was made for an $0.81 debit, which provides $9.19 of upside in the trade by expiration. A quick move to $42.50 would cause the spread to be worth over $5.
With that type of reward-to-risk, it means that the odds of success are going to be limited. The probability of touching, calculated by thinkorswim by TD Ameritrade, shows an 11% chance of reaching $42.50 at any time between now and January 2022.
WFC Technicals
Wells Fargo has been testing its $22.50 support since mid-May and has traded near $25 since the sell-off in March. That was an area of support going back to 2008 to 2011. The fact that we’re back to that level tells you how far the price has fallen since its 2018 all-time high.
It will be hard to find a strong bullish thesis for WFC. Even their last earnings report was met with a lot of selling. One of the great things about option trading is that you can construct about any type of P/L graph as you may want. Taking a 10:1 trade with the price testing support for as long as WFC has may not be a terrible idea.
WFC Option Strategy
While thinking about the upside potential over the next two years is nice, what about looking for a trade that would allow you to play both sides? That means making money if there’s a big move up or down. Our Gamma Iron strategy does just that.
An example of a Gamma Iron is trading the 15 JAN 21 expiration. The Gamma Iron consists of buying an OTM call vertical and a put vertical. Here is a breakdown of the individual legs:
- Buy 15 JAN 21 $27.50 call @ $0.43
- Sell 15 JAN 21 $30 call @ $0.21
- Buy 15 JAN 21 $20 put @ $0.75
- Sell 15 JAN 21 $17.50 put @ $0.30
That leaves a max loss of $0.67 and a max gain of $1.83. That’s a 273% return if max gain is achieved if the stock is above $30 or below $17.50 by expiration. This trade has two breakeven points at $28.17 and $19.33. The image below is a risk profile graph of the P/L at expiration (green) and the P/L as of today (purple).
Conclusion
Wells Fargo has been one of the worst-performing banks in the market. However, if the company can cut costs and make other changes to increase profitability, there could b significant upside. The unusual option activity trade is one option to play a long-term bullish move with limited risk and huge upside. However, a Gamma Iron could be a way to play a breakout in the price over the next few months.
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