Options Hot as Wells Fargo & Co (WFC) CEO Gets Blasted

Wells Fargo & Co (WFC) CEO John Stumpf testified in front of the Senate Banking Committee earlier

Sep 20, 2016 at 2:16 PM
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Options traders are blasting Wells Fargo & Co (NYSE:WFC) today, after CEO John Stumpf faced intense scrutiny in front of the Senate Banking Committee over the financial firm's phony account scandal -- including Senator Elizabeth Warren's, D-Mass., call for Stumpf to resign. At last check, both call and put volume on WFC stock was crossing at two times the average intraday pace -- and in the 99th percentile of their respective annual ranges -- with a number of speculators targeting weekly options that expire on Friday.

Most active is WFC's weekly 9/23 46-strike put, where it looks as if speculators are selling to open the options. If this is the case, put writers expect the $46 level to serve as a floor through week's end. More traditional options traders appear to be purchasing new positions at the stock's weekly 9/23 45.50- and 46.50-strike puts, expecting WFC to breach these levels by Friday's close.

More broadly speaking, it's been call buyers who have targeted WFC stock in recent months. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day call/put volume ratio of 1.37 ranks higher than 78% of all comparable readings taken in the past year.

Echoing this is WFC's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.78. What this shows is that near-the-money call open interest outweighs put open interest among options expiring in three months or less.

Regardless of whether options traders are buying to open calls or puts, now appears to be a prime time to strike on the equity's near-term options. Specifically, WFC's Schaeffer's Volatility Index (SVI) of 22% sits below 66% of all comparable readings taken in the past year. Simply stated, low volatility expectations are currently priced into the equity's short-term options.

On the charts, the stock has been in free fall since Wells Fargo agreed to a $185 million settlement for the fraud case earlier this month. However, this is exactly why Morgan Stanley upgraded the shares to "overweight" from "equal weight" today, saying "headline risks persist, but Wells is rarely this inexpensive," and that this "is an opportunity." As such, shares of WFC are up 1.2% at $46.56 ahead of tomorrow's highly anticipated policy statement from the Fed -- which could create additional volatility for the banking shares.

Meanwhile, although Senator Sherrod Brown, D-Ohio, said Wells Fargo & Co's (NYSE:WFC) response to opening two million unauthorized accounts was inadequate -- which includes a mass firing -- Stumpf said the "board is actively involved." Additionally, he said the financial firm has widened its internal accounting review to now include 2009 and 2010.

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