New Trade WFC: The Fix Is In

by Dan September 14, 2012 3:35 pm • Commentary

Here is a quick summary of the trade that I will be detailing tonight on Options Action on CNBC at 5pm:

This is a bit of an obvious trade, but of all of the large banks, WFC could quite possibly be the largest beneficiary of the FOMC’s latest round of bond purchases given there large exposure to mortgages.

-Technically the chart has been a monster all year as many of it’s money-center bank cousins experienced severe highs and lows.  Heading into yesterday’s Fed meeting the stock was already up ~25% ytd and this week breaking out to levels not seen since late 2008.

5 yr WFC chart from Bloomberg

 

The chart is a monster, but with such a low beta I am not expecting 20% move in a straight-line, this will likely notch higher with strong market, and likely be considered defensive by investors on a move lower given it’s healthy 2.6% dividend yield.

At this point I am just gonna close my eyes and get long.  This Rather than buy the stock though I am going to sell a put to finance the purchase of a call as I don’t see a ton of risk in being short Puts in this name, even with implied vol relatively low.

Trade: WFC ($36.04) Bought Jan 33 / 38 Risk Reversal for .05

-Sold 1 Jan 33 Put at .85
-Bought 1 Jan 38 Call for .90

Break-Even On Jan Expiration:

-Profits above 38.05(up 5.5%)
-Losses below 33.05 (down 8%)

-Btwn 38 and and 33 lose .05, below 33 I am put the stock.

-Structure has about a 60 delta, so on a mark to market basis prior to expiration if stock moves down a dollar I will lose .60, if the stock goes up a buck i make .60, delta will increase as stock goes higher and decrease as it goes lower.