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Bearish Betting Surges on Wells Fargo & Co (WFC) as Earnings Loom

One trader constructs a bear put spread on WFC

by 7/5/2013 11:20 AM
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As Wells Fargo & Co (NYSE:WFC) prepares to report fiscal-second quarter earnings next week, bearish traders are zeroing in on the security in today's session. More than 9,800 puts have switched hands so far, which is a 58% mark-up over the stock's expected intraday put volume. By contrast, just over 6,200 calls have traded.

Digging deeper into the data reveals that one speculator employed a bear put spread on WFC. Specifically, a block of 1,056 puts was sold at the August 36 strike for $0.12 each, while an equal number of puts was bought at the August 40 strike for $0.67 apiece. This resulted in a net debit of $0.55 per pair of contracts. Meanwhile, Trade-Alert confirms this was a newly initiated strategy.

The breakeven rail in this case is $39.45, or the bought strike less the net debit. His maximum profit is limited to $3.45 (difference between strike prices, minus the net debit), no matter how far WFC should sink beneath $36, while his potential risk is capped at the net debit paid.

This skepticism toward the financial services firm isn't exactly eyebrow-raising news, however. In fact, WFC's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.96 ranks in the 83rd percentile of its annual range. In other words, traders have picked up puts over calls at a faster clip just 17% of the time during the past year.

On the technical front, Wells Fargo & Co (NYSE:WFC) has climbed more than 22% so far this year to perch at $41.80, and has outperformed the broader S&P 500 Index (SPX) by over 8 percentage points during the past two months. On the charts, the stock's recent pullback was contained by its 40-day moving average, which has acted as support since December.

As previously alluded to, WFC is due to reveal quarterly earnings before the market opens on Friday, July 12, and has bested consensus estimates in seven of the past eight quarters. Although the security went on to trade an average of 0.8% lower the day after posting results, it regained momentum to hover 0.8% higher a week later. Analysts are currently expecting a profit of 92 cents per share.


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