Wells Fargo Put Options Premiums Explode After Fed Restrictions

WFC stock has received no fewer than five downgrades

Feb 5, 2018 at 9:59 AM
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Wells Fargo & Co (NYSE:WFC) stock is sinking this morning, down 8.2% to trade at $59.01, after the Federal Reserve on Friday took action over the big bank's fake account scandal, discovered in 2016. Under outgoing Fed Chair Janet Yellen -- who will be replaced today by Jerome Powell -- the central bank cited "widespread consumer abuses," and restricted WFC from any additional asset growth until it "sufficiently improves its governance and controls." Wells Fargo said it would submit a detailed plan to the Fed within 60 days, and will replace four directors this year.

Adding additional pressure on the financial shares is a round of bearish analyst notes, with no fewer than five brokerages downgrading WFC stock. J.P. Morgan Securities, for example, cut its rating to "underweight" from "neutral," saying "the harsh Fed consent order is rare." Morgan Stanley issued a similar downgrade, while also slashing its price target by $11 to $64, saying this "limits growth in an era of strong macro benefits."

Today's bear gap has WFC stock trading south of $60 for the first time since mid-December -- a key level that marked the equity's March 2017 top, and roughly coincides with its year-to-date breakeven. Since hitting a record high of $66.31 one week ago, the shares have now shed 11%.

The shares could be at risk of even bigger losses, too, should more skeptics pile on. While short interest rose 6.5% in the most recent reporting period, the 36.2 million WFC shares sold short represent a slim 0.8% of the equity's available float -- suggesting the bearish bandwagon is far from full.

However, those wanting to bet on more downside for WFC with options could find it difficult to maximize the benefits of leverage. Heading into today's trading, put options were pricing in relatively middling volatility expectations, per the stock's 30-day implied volatility skew -- which closed Friday at 10.6%, right in the 50th percentile of its annual range.

Today, though, these bearish options prices have exploded, with this volatility metric last seen at 14.6%, in the 86th annual percentile. Nevertheless, put volume is popping, with 27,000 contracts traded within the first 30 minutes of trading, with buy-to-open activity detected at the weekly 2/9 55-strike puts.


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