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With Wells Fargo & Co (NYSE:WFC) due to report earnings tomorrow morning, traders yesterday walked a decisively bearish path. Roughly 39,000 puts changed hands -- more than three times the daily norm, and 1.5 times the number of calls exchanged. Against this backdrop, the financial stock's 30-day at-the-money implied volatility spiked 7.4% to 16.2%, signaling elevated demand for short-term options.
Far and away the most active option was WFC's weekly 7/25 51.50-strike put, where nearly 18,800 contracts -- including a massive sweep of 14,031 -- crossed the tape. Almost all of the activity transpired at the ask price, and open interest soared overnight, collectively inferring buy-to-open activity. By purchasing the out-of-the-money puts for a volume-weighted average price (VWAP) of $0.58, the speculators expressed confidence Wells Fargo will be sitting below $50.92 (strike less VWAP) at the close on Friday, July 25, when the weekly contracts expire. The traders will reap additional gains south of breakeven on a move all the way down to zero. By contrast, the most they have at stake is the initial premium paid, should the shares be perched above the strike at expiration.
On the charts, WFC sports solid 14.4% year-to-date advance, but is currently 0.5% lower at $51.92, following an early morning downgrade -- and an overall retreat amid the broader equities markets. Nevertheless, the equity's technical picture remains strong -- specifically, my colleague Elizabeth Harrow noted earlier that the shares have benefited from long-term support at their underfoot 40- and 80-day moving averages.
Finally -- and as alluded to previously -- Wells Fargo & Co (NYSE:WFC) will step into the earnings confessional less than 24 hours from now. History seems to favor the bulls. The financial giant has topped analysts' bottom-line estimates in each of the past eight quarters, resulting in an average gain of 1.4% in the ensuing week.