Today’s trade idea for options traders: Wells Fargo (trade closed)
(Last Updated On: 7. January 2023)
The financial sector has been beaten down in 2020, and Wells Fargo was not an exception at all. In fact, it has probably been hit harder than most banks in the U.S. And this is after already poor performance in its recent years of scandals. The most prominent case I still remember is the account fraud scandal which was made public in 2016. Longtime investor Warren Buffett has also significantly cut his position in the bank. But it’s still one of the largest financial institutions in the U.S. and is very well established, despite its past reputational issues. And as options traders usually look for short-term opportunities, they should take them. Therefore, let’s check this trade idea on Wells Fargo.
The information I am giving you in this article is for informative purposes only and should not be treated as investment advice. The information presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in trading activities related to the information in this article should do their own research and seek advice from a licensed financial adviser.
Type of a trade: Cash secured put (just a bit in the money)
Alternatively: Bull put spread
Expiration: 22th January 2021 (50 days)
Premium for 1 option: between $190 and $205 on the day this article was published
Margin: apprx. $600 on the day this article was published
Pros for this trade:
– A long signal (I’m using the ADX-Indicator) is giving a higher probability that the price could be pushed over the strike and staying there in the next 50 days
– December provides a statistical probability of the year-end rally and hence, higher to push the stock price to the out-of-the-money area
– Acceptable bid/ask spread as the stock and options have a good liquidity. This would give a higher chance to close the trade faster at better conditions
Cons for this trade:
– Low IV Rank of 21% and low IV Percentile of about 33% (Source: Trader Work Station)
– The Fear & Greed-Index is hanging around its extreme greed values which could mean a short-term risk of a sudden stronger correction or even a crash in the stock markets briefly before expiration of the option. Keep this in mind in case you don’t want to get the stock assigned.
– In case the price gets settled under the strike and you get the stock assigned, you will get a pretty low dividend of currently about 1.37%
Result of this trade:
You could close the position on 6th January 2021 for about $19 – $20
Realized profit for 1 option: $179 – 180$
Days in the trade: 34 (of maximum 50 days)